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A little reform, a lot of talk

By themselves, the so-called reforms don’t mean much, but coupled with global liquidity they could give investments a boost

It's a good thing that one can't perform scientific experiments on the stock markets in order to conclusively discover the exact causality of price movements. This means that we will never know the exact cause of the current excitement in the markets and among investors, and that's just as well. Is it caused by the governments' restart on reforms or is it caused by the promise of seemingly infinite liquidity that the US and European central banks have delivered. Or the former, enhanced by the latter?

Either way, one thing is clear. These reforms are not even close to the fundamental change that the country needs. If one takes the charitable view it could be interpreted as an indication that the government is serious about doing something to enhance growth. I, for one, simply do not believe that. Ask anyone managing a business today what are the big constraints. You'll get a long list. Interest rates are too high. There's no power. Real estate is too expensive. Employees are poorly educated. There's no public transport to bring employees to work. Transport for raw material and finished goods is expensive and unreliable. There's a huge amount of corruption and coercion in dealing with government departments wielding archaic anti-business laws. In many parts of the country, especially in industrial areas, criminalised labour leaders rule the roost, often in cahoots with local politicians.

Tell me, based on what you have observed in the country's polity over the last few weeks, which of these problems is closer to a solution? The answer is probably zero. Maybe, just maybe, if the fiscal situation doesn't become disastrous, interest rates could come down slightly but that's about it. The rest of these problems won't become significantly better for years, probably decades.

Diesel prices have been raised by a fraction of what was needed. Some forms of FDI have been permitted and a handful of other measures have been announced. In response, there has been a firestorm of political problems for the government. The opposition is up in arms and what is worse is that if the Delhi grapevine is to be believed, there's much disquiet in the ruling party itself. Apparently, there's talk of how the food security bill has now become a necessity in order to prove the government's 'pro-poor' credentials. Meanwhile, the Prime Minister has spoken to the nation, telling us that money doesn't grow on trees. Unfortunately, in the process, he has probably exhausted his next several years' quota of speaking and so can no longer be relied upon for any more economics lessons. However, I have a feeling that right now, someone is probably checking out the Rashtrapati Bhavan's beautiful Mughal Gardens to confirm whether money actually doesn't grow on trees.

So where does that leave us? Well, it's up to you to decide for yourself where it leaves us as a nation and where it leaves you as an individual, but the strange thing is that as investors, the situation is not all that bad. The key thing is that the currency printing presses of the United States and Europe will continue working hard for the foreseeable future, high quality and well-run Indian businesses may not be starved of capital. Combined with some measure of optimism and an increased flow of foreign investments, it's not a bad time for invest in stocks.

However, we'll have to be wary of the froth. Not every stock that has jumped up in recent days has any substance and not every IPO will be worth paying attention to. As always, even minor turnarounds in the markets can be dangerous in luring investors to stocks that are driven just by liquidity and momentum. That's where Wealth Insight comes into the picture, to separate the good, the bad and the ugly.