View from Delhi: Pundits optimistic despite market slide

Stock markets do not always reflect the economy. After touching 5,000 points last week, the Bombay Sensex lost its foothold and dropped 250 points in four days at a time when all business indicators pointed upwards. But the pundits have not lost hope. They say the Sensex will cross 6,000 by budget time in February and probably go on to set another record after the budget.

Actually October was a good month for industry, especially durable goods. Passenger cars sold 20 to 25 per cent more than last year's numbers, and some companies like Tata Motors made a killing.

Mahindra & Mahindra, which brings out a popular sports utility vehicle, Scorpio, says that it is swamped with orders and is adding a new shift. Some colour TV companies ran out of stocks during Diwali, as they had not anticipated the surge in demand.

According to the latest business confidence survey, 75 per cent of companies with a turnover of Rs5 billion and above believe that overall economic conditions will improve further in the next six months. The investment climate is generally positive and capacity utilisation almost 100 per cent. At 150, the confidence index is 10 per cent higher than this time last year.

The bullish sentiment is also reflected in the way consumers are behaving. Indians are generally careful with money and do not go in for large-scale borrowing. But that was yesterday, when money was tight and incomes small. Now money is no problem as banks are falling over themselves to lend cash at mouthwateringly low interest rates.

Interest rates have come down heavily in the last few years. The bank rate, the rate at which banks borrow money from other banks, has come down from 10.5 per cent in 1997 to 6 per cent.

For loans for cars and other durable goods banks charge only 11 per cent a year against as much as 16 per cent six years ago. And for housing, the going rate has dipped to 7.75 per cent, half of what the banks charged in 1997.

Middle class households are splurging. According to a report by Merrill Lynch, an investment agency, bank lending to households has trebled to Rs1.6 trillion or over $30 billion, as Indians spend on everything from homes and cars to foreign holidays.

You can purchase a car costing Rs800,000 for a monthly outgo of Rs19,000 (for five years), which working couples can easily afford. A holiday in Europe costs less than Rs6,000 a month and banks offer educational loans repayable in seven years at 11 per cent interest. All you need is a friendly bank manager, and most bank managers are friendly nowadays.

Spending patterns are changing rapidly. You don't see many bicycles on Delhi roads. It's either flashy motorbikes or small Marutis. Motorcycles now cost what cars used to cost 20 years ago. And you don't have to shell out lots of cash to get one. Most city households can now afford a motorbike and at least one in ten can afford a car.

Some household cash does go into stock markets but not much. It is actually foreign money that is driving the stock markets, and, of course, mutual funds. Indians prefer to invest in mutual funds, which are safer, though not totally riskless. Most big business houses run mutual funds of their own, including the Tatas and Ambanis. But they don't do as much business as those run by banks.

How long will the boom last? Your guess is as good as mine.

The author is a India-based senior economic adviser