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Chapter-5
IMPACT OF BOOM, BUBBLE & BUST IN STOCK MARKET
IN INDIA
Introduction
Definition of 'Boom'
A period of time during which sales of a product or business activity increases
very rapidly. In the stock market, booms are associated with bull markets,
whereas busts are associated with bear markets. The cyclical nature of the
market and the economy in general suggests that every strong economic growth
bull market in history has been followed by a sluggish low growth bear market.
Stocks that suddenly become very popular and gain strong elevated market
profits are the result of a stock boom. An example of this is the internet
technologies boom or "dot-com bubble" that occurred during the late '90s. This
was one of the most famous booms in stock market history. As often occurs in a
boom-and-bust cycle, this boom was followed by one of the biggest busts in
history. This occurs because the growth that takes place in a boom is rarely
maintained and backed up by actual company profits.
It has been empirically documented that the IPO marketexperiences cycles in
terms of volumes of new companies, whichis referred to in the literature as
hot and cold periods. It isconsidered to be an empirical anomaly for which
no unanimousexplanation is yet provided for. The most well-known among
thesighted explanations is technological innovation or positiveproductivity
shock that changes the prospects of IPOs from aparticular industry. Empirical
studies have found that small andyoung firms time their offers to use investors
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optimism in theirfavour and get listed during the booming period. There
areevidences of high under-pricing and industry clustering during thehot
periods, though their nature and extent have differed fromcountry to country1.
Only four countries in the world (namely U.S.A., India,Romania and
Canada)2have more than three thousand listedcompanies in their stock
exchanges. In India, during 1990s alone,3,537 companies got listed on the
Bombay Stock Exchange (BSE).
The last decade is also important, since the Indian economy ingeneral and
primary capital market, in particular, has undergoneremarkable changes duringthis period. The liberalisationprogramme initiated in 1992 along with other
changes has enabledlarge Foreign Direct Investment (FDI) and Foreign
InstitutionalInvestment (FII) inflows, giving a big push to the capital market.
The abolition of the Controller of Capital Issues (CCI) also had amajor impact
on the activities in the Indian primary market. Itwitnessed a boom phase (1993-
96) when more than 50 companiesgot listed every month. However, from end
1996 till recently theprimary market has witnessed a considerable decline in the
numberof new issues and the total amount of capital rose.
A stock market boom is caused when many investors join the market and
speculate with more funds than they did previously, leading to a sudden jump in
growth and often a jump in profits for many investors. The boom is the opposite
of a bust, where the markets suddenly collapses, and are related to each other.
The boom is caused by several things, including over-exuberance on the part of
investors.
1. Wild Optimism
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A boom has energy of its own, a snowball effect that keeps it going stronger the
larger the effect grows. Investors are spurred on by the market itself to make
increasingly larger speculations, and a general feeling grows that risks are worth
the price of making money in current positive market conditions. This wild
optimism results in a flocking to the market, especially to popular industries.
New Technology
New technology is one of the most common reasons for stock market booms.
New technology not only creates entire new industries to invest in (investors,
remembering the vast growth of computer stocks like IBM, always reactpositively to new tech industries), but also affects many other types of
businesses. If technology helps businesses improve functionality, then their
stocks are likely to increase under the hopeful eyes of investors as well.
Increase in Businesses
Another common cause of a stock market boom is an increase in businesses.
Times that see a sharp rise in the number of new businesses, or the number of
businesses that entrepreneurs decide to go public with, often coincide with a
stock market boom. New businesses mean new investment opportunities, and
the chance of some businesses to become extremely successful.
Financial Changes
Widespread
Ad financial changes also cause stock market booms, often when
governments support markets in some way. They may release funds to
bailout companies or create new tax benefits for businesses, but these
typically only lead to small increases. Booms are caused more often by
governments deregulating industries and making it easier for businessesto sell stock, start or seek funding.
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Cyclic Nature
An overarching cause of stock market booms is the cyclical nature of the stock
market. Due to many different factors, markets naturally go through booms and
busts, sometimes large and sometimes small. The seeds of each bust are in each
boom, and vice-versa. This means that the busts where a stock market falls
prepare the way for the next boom and surge of growth with new investment.
The Stock Market Boom
Although the stock market has the reputation of being a risky investment, it did
not appear that way in the 1920s. With the mood of the country exuberant, the
stock market seemed an infallible investment in the future.
As more people invested in the stock market, stock prices began to rise. This
was first noticeable in 1925. Stock prices then bobbed up and down throughout
1925 and 1926, followed by a strong upward trend in 1927. The strong bull
market (when prices are rising in the stock market) enticed even more people to
invest. And by 1928, a stock market boom had begun.
The stock market boom changed the way investors viewed the stock market. No
longer was the stock market for long-term investment. Rather, in 1928, the
stock market had become a place where everyday people truly believed that
they could become rich. Interest in the stock market reached a fevered pitch.
Stocks had become the talk of every town. Discussions about stocks could be
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heard everywhere, from parties to barber shops. As newspapers reported stories
of ordinary people - like chauffeurs, maids, and teachers - making millions off
the stock market, the fervor to buy stocks grew exponentially.
Although an increasing number of people wanted to buy stocks, not everyone
had the money to do so.
Buying on Margin
When someone did not have the money to pay the full price of stocks, they
could buy stocks "on margin." Buying stocks on margin means that the buyer
would put down some of his own money, but the rest he would borrow from a
broker. In the 1920s, the buyer only had to put down 10 to 20 percent of his
own money and thus borrowed 80 to 90 percent of the cost of the stock.
Buying on margin could be very risky. If the price of stock fell lower than the
loan amount, the broker would likely issue a "margin call," which means that
the buyer must come up with the cash to pay back his loan immediately.
In the 1920s, many speculators (people who hoped to make a lot of money on
the stock market) bought stocks on margin. Confident in what seemed a never-
ending rise in prices, many of these speculators neglected to seriously consider
the risk they were taking.
Signs of Trouble
By early 1929, people across the United States were scrambling to get into the
stock market. The profits seemed so assured that even many companies placed
money in the stock market. And even more problematically, some banks placed
customers' money in the stock market (without their knowledge). With the stock
market prices upward bound, everything seemed wonderful. When the great
crash hit in October, these people were taken by surprise. However, there had
been warning signs.
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On March 25, 1929, the stock market suffered a mini-crash. It was a prelude of
what was to come. As prices began to drop, panic struck across the country as
margin calls were issued. When banker Charles Mitchell made an
announcement that his bank would keep lending, his reassurance stopped the
panic. Although Mitchell and others tried the tactic of reassurance again in
October, it did not stop the big crash.
By the spring of 1929, there were additional signs that the economy might be
headed for a serious setback. Steel production went down; house construction
slowed; and car sales waned.
At this time, there were also a few reputable people warning of an impending,
major crash; however, as month after month went by without one, those that
advised caution were labeled pessimists and ignored.
Summer Boom
Both the mini-crash and the naysayers were nearly forgotten when the market
surged ahead during the summer of 1929. From June through August, stock
market prices reached their highest levels to date. To many, the continual
increase of stocks seemed inevitable. When economist Irving Fisher stated,
"Stock prices have reached what looks like a permanently high plateau," he was
stating what many speculators wanted to believe.
On September 3, 1929, the stock market reached its peak with the Dow JonesIndustrial Average closing at 381.17. Two days later, the market started
dropping. At first, there was no massive drop. Stock prices fluctuated
throughout September and into October until the massive drop on Black
Thursday.
Black Thursday - October 24, 1929
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On the morning of Thursday, October 24, 1929, stock prices plummeted. Vast
numbers of people were selling their stocks. Margin calls were sent out. People
across the country watched the ticker as the numbers it spit out spelled their
doom. The ticker was so overwhelmed that it quickly fell behind. A crowd
gathered outside of the New York Stock Exchange on Wall Street, stunned at
the downturn. Rumors circulated of people committing suicide.
To the great relief of many, the panic subsided in the afternoon. When a group
of bankers pooled their money and invested a large sum back into the stock
market, their willingness to invest their own money in the stock market
convinced others to stop selling.
The morning had been shocking, but the recovery was amazing. By the end of
the day, many people were again buying stocks at what they thought were
bargain prices.
On "Black Thursday," 12.9 million shares were sold - double the previous
record.
Four days later, the stock market fell again.
STOCK MARKETS: A HISTORY OF BOOM AND BUST
History is littered with stock market dips, shocks and crashes, throwing entire
economies into turmoil. With the FTSE 100 down 23% on its recent high in
2007 and a potential recession on the horizon, Dan Hyde takes a look at the
history of the stock market crash...
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The bears are back: A share trader in New York
The 1720 South Sea Bubble
Following costly British involvement in the War of the Spanish Succession, a
deal was struck with the newly formed South Sea Company to finance the 10m
British debt. Along with 6% interest, the deal also gave the South Sea Company
a monopoly on British trading in the Spanish Americas. Shares in the company
sky-rocketed as speculators spotted a real investment opportunity.
However, trade did not develop well. King Philip of Spain was unwilling to
negotiate more than three annual British voyages to the region and continuous
interruption from officials and short skirmishes with the Spanish culminated
when South Sea ships and assets were confiscated by Spain in 1718.
All the while, the shares became more and more fashionable. Investors,
oblivious to the lack of actual profit being made by the company, fell foul to
company rumor-mongering that claimed of overseas success.
In 1720, though, South Sea's house of cards collapsed. Traders finally caught on
and a mad rush to sell shares ensued, leaving a whole generation of investors
lay in ruins.
To prevent another bubble, the sale of shares was outlawed by the government.
Unfortunately, this made it difficult to start a legitimate business in Britain for
more than a century until eventual repeal in 1825 when another crises hit.
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The Panic of 1825
Britain was again rebuilding after conflict, this time the Napoleonic Wars. The
economy went into overdrive and the liberalizing of trade in Latin America
created an export boom.
Speculation was so intense that some investors even began to throw money into
schemes involving the imaginary South American Republic of Poyais. In
tandem, Bank of England allowed easy finance for the boom.
By April the boom had become a bubble at bursting point. More than seventy
banks collapsed and by Christmas, Bank of England intervention had failed to
quell a now economy-wide panic.
Stormy seas: Hogarthian image of the South Sea Company
Legend has it that the Bank of England was itself in danger of collapse until
reversing its caution and acting as the 'lender of last resort', bankrolled by
French gold.
1866 Over end, Guerney& Co.
With roots deep in Quaker East Anglia, Over end, Guerney had survived the
Panic of 1825 as the great discount bank of its time, second only to the Bank of
England in its turnover, and had since become known as the 'bankers' bank'.
After the retirement of Samuel Guerney, though, a new breed of profit-hungry
company directors expanded its core business into riskier investments such as
shipyards, railways and other long-haul investments.
The bank took short-term loans to fund risky long-term schemes, incurring
liabilities four times the size of its assets. It was a costly mistake. When several
of its creditors collapsed, the bank's share price plummeted and, in desperate
need, it was refused assistance by the Bank of England.
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Boom to bust icon: Napoleon
Over end suspended cash payments and panic spread across the country. The
bank went into liquidation in June and its directors were tried at the Old Bailey
for fraud. Other banks, now unable to find funding, also went under. With
nearly 200 companies defaulting, the ensuing depression lasted several years.
The crisis led to Walter Bagehot's famous call for the Bank of England to act as
the 'lender of last resort' preventing economy-wide collapse by providing the
last line of finance for troubled banks.How this is Money can help investorsnull.
The Wall Street Crash, 1929
Events in 1929 New York represented the most devastating shock in stock
market history.
After the difficulties of the First World War, the twenties represented a period
of peace and prosperity, revolutionized by new technologies such as cars and
radios. For those keen to take advantage, the stock market was the place to
make a quick buck and unprecedented availability led to huge numbers of
ordinary people ploughing their money into booming markets.
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But, as always, the optimism couldn't last forever and the first small dips in the
market began to appear as early as September. As fluctuation continued,
investors began to panic, selling shares in the hope of rescuing dwindling
profits. 'Black Thursday', 24 October, saw shares drop by 13%.
Some Wall Street bankers tried to inspire confidence and lift the market, buying
as many shares as possible, and it worked, at least briefly. By Monday, panic
had struck again and the 29th, 'Black Tuesday', signaled the end of prosperity
and the beginning of the Great Depression of the 1930s.
Within a few days of the downturn near universal trust had turned into universal
suspicion. Thirty billion dollars had been lost in the US alone and it took
twenty-five years for the Dow Jones to recover to pre-1929 levels. The Wall
Street Crash signaled the beginning of one of the most tumultuous periods in
world history.
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1987 Black Monday
On 19 October 1987 world stock markets experienced their largest one-day
crash in history. The falls were practically instantaneous in all financialmarkets. The Dow Jones lost 22.6% of its value and the FTSE 100 sunk 10.8%.
Reverberations from 'Black Monday' were felt across the globe.
The exact causes of the crash remain unknown: it was a moment when fear
eclipsed greed. Prolonged bull markets had prepared the ground for 'bust', but
the shock largely caught investors by surprise.
Within two years the Dow Jones had recovered and trading curbs and circuit
halters were implemented that would suspend markets before they could
collapse. Such a situation materialized for the first time in the 1997 Asian
Crisis.
The Asian Crisis of 1997
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Fears of worldwide economic meltdown were sparked when Thailand decided
to float its currency, the Baht.
After decades of outstanding economic growth in the tiger economies of the Far
East, many countries had borrowed large amounts of international capital.
Thailand's debt meant it was effectively bankrupt and severe devaluation in the
baht saw economic crisis spread to Japan, Korea and the rest of Asia.
The prospect of a complete collapse in the Korean economy, the world's
eleventh largest, led the International Monetary Fund (IMF) to step in, averting
potentially worldwide consequences. The IMF created a series of rescuepackages to restore confidence and by 1999 Asian economies had begun to
recover.
Definitionof Bubble:-
With the aftereffects of the most recent financial crisis still being felt today,
therehas been an astounding amount of public attention surrounding the
subprime mortgagecrisis and how the economy and policy makers should
respond. The idea of speculativebubbles and what happens when they burst is
interesting because it challenges the idea ofmarket efficiency. In fact, these
bubbles point to the power of investor psychology orother behavioural factors
that impact the market in a significant way.
An appropriate starting point would be to define what a speculative bubbleis.Charles P. Kindleberger defines it as a loss of touch with rationality,
something close tomass hysteria.1 Speculative bubbles have been defined as a
trend in which the price of aclass of assets is driven up compared to its
fundamental value, by the herding of investoroptimism into that particular
sector.
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While some have accused the term bubble as being overused by the media
andacademics alike, it well-characterizes the phenomenon in which hyped
investors in themarket flood into specific classes of assets, thereby driving
prices away fromfundamental values. From the tulip mania in the 17th century,
to the subprime mortgagebubble, such crises have been an ever-present
phenomenon in global economies. Whilescholars and policy makers have
strived to improve the financial system and mitigate theoccurrence of future
bubbles, they have continued to present significant challenges to theworld time
and again.
Current research of bubbles has focused mainly on the anatomy of a bubble:
inother words, the process of bubble formulation and the dynamics of a burst.
On the otherhand, the aftereffects of the bursting of a bubble have mostly been
preserved to the arenaof fiscal discussions and public policy: in other words,
how to clean up the mess. Thereare exceptions, however, including Barro and
Ursuas paper Macroeconomic Crisessince 1870 in which the authors focus
on the phenomenon of decreasing consumption(real per capita personal
consumer expenditure) after economic crises, and the lowaverage of real bill
returns observed during crises.2
WHAT CAUSES THE SLOWDOWN IN THE MACRO ECONOMY
AFTER A MARKET CRASH?
Investment
Since a drop in stock returns does not fully explain the decline in GDP
growth,particularly in the longer run, I started to probe possible other reasons
for the decline.
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While the degree of causation among each contributing factor is beyond the
scope of thisanalysis, I speculate that a decrease in liquidity and investment in
the economy caused bythe dishevelment of financial markets could be a
significant force that prolongs the effectof market bubbles.
For instance, the following quote from Kalemli-Ozcan, et al. explains
theimportance of a troubled banking sector that cannot provide credit to
domestic firms9and the corresponding slowdown in the economic productivity
during a crisis:
Liquidity decreases because domestic banks cannot provide credit. At thesame timecapital flows come to a halt and foreigners exit from the crisis
economy, so-calledsudden stops, leading to a decline in foreign credit. As a
result, the liquidity constrainedfirms cannot undertake new investment and
hence contract production.10(Kalemli-Ozcan, et. al, 2010)
In other words, a crash in the stock market could lead to a deterioration
ofinvestors availability of funds and confidence in the market, which would
then lead todecreased investment. This decreased investment would then cause
a shortage of fundsfor banks and other lenders, which would immediately mean
a decline in liquidity forfirms. The firms, then, would cut down on their capital
expenditures, thus causing aslowdown in production.
In fact, Poulsen and Hufbauer have shown that the level of foreign
directinvestment (FDI) decreases quite dramatically during a crisis, and that an
important causeof recessions after crises may be the traditional strong link
between economic growthand FDI flows.11 Figure 1 demonstrates the
correlation between FDI levels and GDPgrowth in the most recent crisis. The
figure suggests that the level of FDI and GDPgrowth becomes strongly
correlated during a crisis while the relationship is not as clearfor non-crisis
periods.
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Figure 1. FDI and Real GDP growth
(Source: Poulsen, L. (2011). Foreign direct investment in times of crisis)
Unemployment
In addition to the level of investment in the economy, data also shows that there
isa significant correlation between the bursting of a bubble and the rise inunemploymentrate with a 1-year lag and that this correlation persists for at least
three years. The lagswere calculated as the effect of the occurrence of a bubble,
measured by a dummyvariable (1 if bubble, 0 if not) and the unemployment rate
1) in the concurrent period, 2) ayear afterwards, 3) 2 years afterwards, and 4) 3
years afterwards. Table 4 shows that theimpact of a bubble on the
unemployment rate lasts longer than the impact of a bubble onGDP growth;
While the impact of a bubble on the GDP growth peaks at a year after thecrisis
and fades away, the relationship between the occurrence of a bubble
andunemployment rate is affected even three years after a crash. The results
were robustwhen country dummies were included. In the following regression,
the dummy variablewas 1 if there was a bubble in the time period observed
minus the 0, 1, 2, or 3-year lag.The dummy variable was 0 when there was no
bubble during the previously mentionedtime frame.
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Table 4.Results of the regression:unemployment%tt+1 =dummy + c
Irrational exuberance: Martha Lane Fox, who floated lastminute.com at
the peak
During the 1990s, the surging popularity of the internet and computer
technologies, seen as the future of business and trading, culminated in
disappointment in 2000/01. Speculative investment in internet firms, many of
whom put growth before profit, backfired spectacularly as the market became
saturated with dubious business plans and practices.
Failing companies with plenty of investment but no profits to show for it
triggered the mass sale of shares. Huge numbers of investors and firms who had
wanted a part in the booming sector faced large losses. A mild recession was
triggered in some countries with many left jobless and the Federal Reserve
forced to cut rates to stem the tide.
Many economists and commentators argue that it was the Fed's drastic rate-
cutting that helped pump up the next bubble in property, which has been the
central plank for the current credit crisis and stock market woes of 2008.
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The main stock market index the Bombay Sensex is up 79.6% year-to-date. Is
this astonishing rise justified by fundamentals in the economy or is the Indian
stock market forming another big bubble? In this post let me present some
points to indicate that the stock market in India is in fact forming a bubble that
is not sustainable.
One of the main reasons the US economy collapsed recently is the long-term
explosive growth of the financial sector. In the past few decades the US
economy was mainly driven by the financial sector. The FIRE economy was
comprised of Financial, Insurance and Real Estate sectors. Historically the
financial industries that included banking, investment banking performed the
simple function of lending and deposit-taking and channeling capital from
investors to companies that needed them. They acted as a middle man offering a
valuable service and earned a percentage of the transactions involved. Similarly
the real estate industry was a boring industry that comprised of mainly building
and selling homes to people that could afford them. The insurance industry also
concentrated on offering auto, home and other insurance services to customers.
However all the traditional roles were abandoned in the past few decades as
companies evolved into high profit making machines in a short time with
strategies involving high-octane risk taking. As the financial industry became
the main driver of the US economy, other sectors that constituted the real
economy such as manufacturing lost their significance.
The dramatic rise of the importance of the financial industry can be seen in the
following chart:
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Source: TheAtlantic.com
Writing in The Atlantic in an article titled The Quite Coup Simon Johnson
noted:
From 1973 to 1985, the financial sector never earned more than 16 percent of
domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s,
it oscillated between 21 percent and 30 percent, higher than it had ever been in
the postwar period. This decade, it reached 41 percent. Pay rose just as
dramatically. From 1948 to 1982, average compensation in the financial sector
ranged between 99 percent and 108 percent of the average for all domestic
private industries. From 1983, it shot upward, reaching 181 percent in 2007.
Thus the financial sectors profit alone was an incredible 41% of total domestic
corporate profits in the past decade. As a result of this growth, compensation
levels in the industry sky-rocketed to astronomical levels. During this bubble
period, MBAs were minted by the thousands and any college graduate wanted
to work in Wall Street or the banking industry and make millions.
The financial sectors GDP share also increase significantly in the period from
1990 to 2006. In the US, it increased from 23% to 31%, a full 8 percentage
points. In the UK, it was more than 10% but in France and Germany it was only
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in the 6% range. The chart below shows the growth of the share of the financial
sector in GDP for select advanced economies since the mid-80s.
Source: How might the current financial crisis shape financial sector regulation and structure? Bank
of International Settlements (BIS)
Alan Greenspans cheap money provided fuel to the fire culminating in the
formation of the credit bubble. Once the bubble was popped in late 2007, the
US economy and indeed the global economy went into a tailspin. The financial
sector saw the collapse of many formerly solid and reputed firms like Lehman
Brothers, Bear Stearns, Washington Mutual, IndyMac Bank and many others.
The wrongfully named real estate proved to be a fake sector ending in the
foreclosures of millions of homes and thousands of empty shopping malls and
office buildings in the commercial space. In the insurance industry other than
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AIG no major failures happened since insurance is one industry that is highly
regulated and is controlled by the individual states. AIGs collapse was caused
not by its insurance arm, but by its tiny financial division which played big in
the derivatives market. The financial and real sector that triggered the global
economic crisis was responsible for the millions of jobs that vanished
overnightworldwide and trillions of dollars in wealth that were wiped out. In a
nutshell, the so-called FIRE economy burned the US economy very badly.
So by now you are wondering what does the above have anything to do with the
Indian economy. Well there is a lot in fact when we compare the US and India.
Similar to the US, where the financial sector became a major part of the
economy, the banking sector and insurance sector is growing to be a big part of
the Indian economy.
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The banking and insurance sector contributed less than 11% in 1990. In 2007 it
amounted to about 15%. While it is still less than the growth of the financial
sector in the US, it is still a cause for concern. The financial sector is growing
rapidly in India and is fueling various speculative bubbles including the real
estate bubble.
A few of the other factors that are inflating the bubble in India include:
1. From its March low of 8,160 the Sensex closed at 17,326 on Friday for a gain
of over 100%. In the past few months Foreign Institutional Investors (FIIs) have
poured at least $1B monthly in the Indian market pulling it all the way to 17K+levels in just 6 months. While a billion $ is not much in a developed market like
the US or in Europe, it has a lot of weight in emerging markets like India where
most stocks do not have high trading volumes. Hence it is easy to move the
market one way or the other with large bets.
Source: Frontline
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The current P/E of the market is over 21.The fundamentals of the economy does
not support this growth in the market. When foreign investors pulled out nearly
$12B from the market the bottom fell out. Now they have poured in around $9B
till September this year.
2. Due to political interference India does not have the capacity to absorb all the
foreign capital flowing into the country. This is especially true with Foreign
Direct Investment (FDI) where land acquisition for factories is a huge problem.
According to a BusinessWeek article Whats Holding India Back some $98
billion in investments by business is on hold due to farmers unwilling to sell
land for industrial purposes.
3. Corruption at all levels is another drag on the economy. From petty
government office clerks to high level multi-billion dollar military deals,
corruption is common. Transparency International ranks India number 85 in its
annual corruption perceptions index.
4. The Real Estate sector is the largest bubble India has ever seen. Prices of
ordinary house, apartments and even land have skyrocketed in the past few
years. Speculators play the real estate market like Americans did up until 2007.
5. The IT sector is given too much importance when in fact it employs a tiny
percentage of the working population. Despite the foreign exchange the IT
industry brings into the country, the IT industry is just considered as a cheap
labor source for foreign companies looking to save money. Many domestic
Indians do not trust in the IT sector helping in the development of India.
6. Exports are down at the annual rate of 20% thru September this year.
Domestic consumption cannot replace the fall in exports to overseas markets.
7. In addition to the foreign capital, the majority of the current growth is coming
from government spending thru stimulus plans. The government borrows
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heavily to fund the expensive stimulus plans. Once the spending is over growth
will slow down to a trickle.
8. Stocks are rising to sky high levels without strong fundamentals. Many stocks
jump double digit percentages in a week like during the dot-com bubble era in
the US. Speculation is rampant with many investors trying to make a quick buck
as the market keeps going up. After last years dramatic fall, irrational
exuberance has returned to the Indian markets.
9. The lack of a vast bond market, forces many investors to invest in the equity
market which pushes prices to abnormal levels.
The Latest Crisis
Stock index returns:
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(Source: Yahoo Finance)
Unemployment rate:
(Source: World Bank)
The graphs show that, even though the S&P 500 started to
recover in the first quarter of2009, unemployment was still
rising until 2010. This trend is consistent with the findingsfrom
this paper. In addition, while per capita GDP decreased from
2008 to 2009, it hadstarted to recover from 2009 to 2010.
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1Kindleberger, Charles. Manias, Panics, and Crashes: A History of Financial Crises. pp 38
9 Kalemli-Ozcan et al. What Hinders Investment in the Aftermath of Financial Crises:
Insolvent Firms or Illiquid Banks? (2010)
10Kalemli-Ozcan et al. What Hinders Investment in the Aftermath of Financial Crises:
Insolvent Firms or Illiquid Banks? (2010)
11
Poulsen, L., Hufbauer, G. (2011). Foreign direct investment in times of crisis.