Obstacles for a bull run

There's nothing quite like a bull market. You can make lots of money by picking up shares of just about any business. It's no wonder that this magazine wants me to figure out what it might take to get another bull run going. But I have a different take. It might help to list, instead, the things that will obstruct the return and sustenance of a bull run. We might see a pullback rally, but for a real bull market we need to remove the pathogens that have infested the Indian economy.

The first one is easy money. This is not to be confused with just 'money', large dollops of which are essential for any sustainable bull run. It's the 'easy' part that is difficult to fix. The virus of easy money is caused by inaction (and tacit encouragement via monetary action) on the part of the government and market regulators to swell credit in the economy. Whatever happened to risk reporting, capital adequacy and provisioning norms? It's one thing for investment bankers on Wall (or Dalal) Street to get greedy and peddle their esoteric financial products, and quite another for the Fed (or RBI) to continuously loosen the money supply and look the other way while these products infest major banks' balance sheets.

This leads to the second impediment, which is leverage. By itself, debt is noble. It calls for disciplined, periodic interest outflows and repayment of principal. The lender has to take a prudent call on the servicing capability of the borrower (via an appraisal) and protect himself against a potential impairment in this capability (via some security or charge). In their hurry to grow loan books, lenders recklessly encourage incapable, vulnerable and crooked borrowers to buy credit 'ammunition' that would otherwise be scarce.

Another problem that the regulators are still struggling with is ensuring that gullible investors are not misled by crooked managements into investing in junk schemes. Preventing the IPO companies from making formal projections was only a beginning. Getting the companies to make bigger disclosures, implementing uniform income recognition standards and restricting them from sharing privileged information selectively are some initiatives that need to be evolved.

The truly monstrous hurdle is governance. Think of what we might achieve if our administrators are even half as committed as those in other parts of the world. What if Mumbai's roads could be at par with Shanghai's or if government employees in Delhi were as diligent as their counterparts in Singapore? How about ensuring that Bihar has a health system as efficient as the UK's National Health Service? We need to get rid of the massive drain that administrative inefficiency and political crookedness imposes on our economic output for a bull market to return.

—Dipen Sheth is the Head of Research, Wealth Management Advisory Services.