A Tidal Wave of Liq­uid­ity

Utilise the dol­lar del­uge to drive eco­nomic growth, not let it cre­ate eq­uity, debt and land bub­bles

The Economic Times - - The Edit Page - Swami­nathan S An­kle­saria Ai­yar

Ihave long cau­tioned the pub­lic against ex­pect­ing too much too early from a Modi vic­tory. The con­straints fac­ing In­dia are deeply en­trenched. How­ever, within 10 days of the re­sult, one of the big­gest struc­tural con­straints, lack of all sorts of liq­uid­ity, is di­min­ish­ing, maybe even van­ish­ing.

Two years ago, when GDP was sink­ing and de­ci­sion-mak­ing was paral­ysed, Moody’s threat­ened to down­grade In­dia’s credit rat­ing. This would have meant an out­flow of maybe $50-100 bil­lion from for­eign in­vestors, caus­ing a crash in the ru­pee, a se­ri­ous forex cri­sis and eco­nomic mayhem. At this point, So­nia Gandhi re­called P Chi­dambaram to the fi­nance min­istry, and gave him a free hand to re­vive the econ­omy.

Chi­dambaram cre­ated a Cab­i­net Com­mit­tee on In­vest­ment that cleared .` 6 lakh crore worth of stuck projects. Alas, this did not trans­late into any boom in cap­i­tal goods or con­struc­tion or­ders. The rea­sons in­cluded state-level bar­ri­ers, no­tably in land ac­qui­si­tion. But even more im­por­tant was the liq­uid­ity crunch.

Lack of fuel, land ac­qui­si­tion and tar­iff re­vi­sions, com­bined with over­ag­gres­sive bid­ding, had pushed in­fra­struc­ture com­pa­nies deep into the red. They could not re­pay dues, and had no ca­pac­ity to raise fresh eq­uity or debt. In­deed, the banks that had lent huge sums to these com­pa­nies started sink­ing un­der un­prece­dented non-per­form­ing as­sets (NPAs). They could not fi­nance fur­ther growth with­out mas­sive re­cap­i­tal­i­sa­tion. Yet, New Delhi was un­der se­vere fis­cal stress and lacked cash for large-scale re­cap­i­tal­i­sa­tion.

Lack of liq­uid­ity loomed large as a ma­jor struc­tural con­straint for the new Modi govern­ment. No quick so­lu­tion seemed pos­si­ble. Yet, in the last fort­night, liq­uid­ity has flooded into In­dia like a tidal wave. There is too much money, not too lit­tle.

Boom­ing Stock of In­dia, Pak

For­eign in­sti­tu­tional in­vestors (FII) have poured in over $4 bil­lion since the be­gin­ning of April. In part, this rep­re­sents a re­vival of global in­ter­est in all emerg­ing mar­kets. In­deed, neigh­bour­ing Pak­istan has en­joyed one of the big­gest stock mar­ket booms any­where, even though there is no Modi there. But while FIIs have been pour­ing money into In­dia for nine months, In­di­ans have been steady sell­ers. Re­demp­tions from mu­tual funds have meant a steady shrink­age of In­dian in­sti­tu­tional in­ter­est. In­dian re­tail in­vestors have been flee­ing from the stock mar­kets into gold and fixed de­posits since 2008.

Sud­denly, even this has changed. For the first time in five years, an additional 3.85 lakh In­dian in­vestors en­tered the mar­kets through mu­tual funds in April. This trend be­gan even be­fore the elec­tion re­sult, with grow­ing con­fi­dence that Modi would win and trans­form the econ­omy.

The Sen­sex is up 10% in the last month. But many small- and medium-cap stocks are up 50-100%. The most beat-up bank and in­fra­struc­ture stocks have soared. Just a few days ago, DLF was able to raise .` 525 crore through commercial mort­gage-ba- cked se­cu­ri­ties. Now, commercial real es­tate has been bat­tered so badly that it was till now viewed as un­touch­able. In­fra­struc­ture was much the same. Yet, both these sec­tors are now en­joy­ing soar­ing prices.

Sud­denly, these com­pa­nies can find a way for­ward by rais­ing fresh eq­uity and loans. Re­liance In­fra­struc­ture, Jaypee and oth­ers have aban­doned ear­lier plans to sell as­sets to prune debt: they think the mar­ket is now liq­uid enough. The re­vival of these debt-heavy com­pa­nies means that bank NPAs have also eased.

And the NHAI has de­cided to al­low com­pa­nies in pub­lic-pri­vate part­ner­ships to de­fer pay­ments of their pre­mi­ums, worth over .` 6,000 crore, in phases till 2026.

Money on Tap

This means that the cash flow of the com­pa­nies will im­prove dra­mat­i­cally. Even bet­ter, banks (and not the NHAI) now have first claim on the cash flow of these com­pa­nies, and so, bank NPAs will im­me­di­ately drop, eas­ing re­cap­i­tal­i­sa­tion wor­ries.

Mean­while, the in­flow of dol­lars into mar­kets has caused the ru­pee to strengthen to .` 58.50 per dol­lar. The RBI has been forced to in­ter­vene to pre­vent an over-strong ru­pee from hit­ting ex­port prof­itabil­ity.

RBI Pulls Out Um­brel­las

Forex re­serves have been ris­ing since Jan­uary, but ac­cel­er­ated by an­other $11 bil­lion be­tween the be­gin­ning of April and May 20. For­eign­ers are plung­ing into both eq­uity and debt mar­kets. To pre­vent ex­cess ac­cu­mu­la­tion of dol­lars, the RBI has lib­er­alised the im­port of gold, and is ex­pected to soon lib­er­alise dol­lar re­mit­tances abroad by In­di­ans.

Sud­denly, a coun­try lack­ing liq­uid­ity is drown­ing in it. Money is avail­able in the form of dol­lars, debt and eq­uity. What looked like a deep struc­tural prob­lem has van­ished like the morn­ing mist.

Un­less this liq­uid­ity trans­lates into real growth, it will cre­ate un­sus­tain­able bub­bles in stocks, debt and land. But the por­tents are good. Many struc­tural prob­lems re­main. But the pres­sures on liq­uid­ity, forex re­serves, bank NPAs and re­cap­i­tal­i­sa­tion have all eased. This does not guar­an­tee a happy end­ing. But it does mean that the Modi regime has got off to an un­ex­pect­edly good start.


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