Over the last couple of months, an overwhelming proportion of discussions about investing have tended to focus on politics, policies, the budget and such. However, underlying all this, there is a sense among equity investors that at some point or the other, it’ll be time for a sustained bull-run. We all have this deep belief in the cyclicality of the markets. In the two decades since the beginning of economic liberalisation, that’s what our experience as equity investors has taught us. Eventually, we’re sure, things come around and a secular, broad-based equities bull-market will start.
In a sense, investors impatiently await the government (and the world in general) to do some things right, to solve some crises so that we can resume the trajectory that is our right. Unfortunately, it’s increasingly clear that the story may not turn out that way, at least not quite yet.
For this to change there are two components that are needed—money to grow and run business should be available at a reasonable rate; and businessmen should have the enthusiasm (otherwise known as animal spirits) to invest for the future. A long-term investment, whether it is financial or whether it is in an actual business always has to go beyond just numbers. At some level, it has to be an act of faith that the future will be better than today and it’s worthwhile to bet on that future.
Both these things are a problem and the reasons come back squarely to the governments. After the budget, there’s been a lot of discussion about the fiscal deficit and whether the figure of 5.1 per cent projected by the finance minister is achievable or credible or whatever. Actually, the precise number doesn’t matter. For businesses, one thing is clear—whatever the savings and surpluses that are generated in the country will first be absorbed by the government and then whatever is left over will be for businesses to invest and grow.
The government has budgeted a borrowing of Rs 4.79 lakh crore over the year. Even if everything goes just as budgeted, this will be well over 50 per cent of the total increase of deposits over the year. And if there were any deterioration anywhere, then it would be far worse. No matter what, businesses are going to be squeezed out of the borrowings market by the government.
There’s a strange thing about the public discussion of government expenditure—it focuses exclusively on cutting or growing subsidies. To all intents and purposes, it’s as if the only thing that the government spends on is subsidies and the rest of the official machinery runs on love and fresh air. The idea that routine functioning of the government might do with some cost-cutting or efficiency or might actually have some wasteful parts to it is now never discussed. It’s just a given that that can’t change and that expenditure will keep growing at a high rate.
In the business media, there’s been quite a build-up to the fact that the Reserve Bank will cut repo rates in April and that money will eventually be cheaper. Actually, the RBI’s trimming of what is the shortest-term rate in the economy is now of decreasing importance. Whatever little the central bank is now able to do is not going to transmit strongly to the quantum and the long-term rates of funds available to the private sector.
So where does all this leave the investor? Does it mean that the equity investor should hunker down and look for the best-priced deposits and bonds for the next few years? If money is going to be short for businesses then perhaps the only game left in town is to try and get as much as possible from fixed-income options for one’s money. The truth is a little different. In a time of broad-based equity gains (as in 2004-2007), it matters less where you invest. In times to come, picking out businesses that will do better will be more difficult but probably more rewarding for the investor.
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