The weakness in Asian markets only sought to undermine the sentiment further. After opening around 200 points below its previous close, the 30-share Sensex kept sliding through the session to close at 17,349.07, down 385.61 points, or 2.2%, over Thursday’s level. The 50-share Nifty dropped 81.05 points, or 1.6%, to close at 5,110.75.

Brokers said traders were keeping their commitments to the minimum, waiting for the Union Budget next week before firming up their views.

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Fears of an impending recession in the US are weighing down world markets and Indian shares have not been spared by the bearish mood around the world. However, the concerns could be exaggerated, felt DBS Cholamandalam AMC head-equities R Rajagopal. “Valuations, at this time, are very attractive,” he said. “India, to a large extent, will not be affected by the (expected) recession in the US. BRIC nations have shown resilience to recession in developed world,” he added.

Banking, IT and oil and gas shares were the worst performers on Friday, with frontline stocks like Bajaj Auto, HDFC Bank and Satyam Computers shedding over 4% each. Mid-cap and small-cap shares fared better compared with their large-cap counterparts.

Among key Asian markets, China was the worst performer, shedding over 3% on concerns that the earnings growth may fall short of investor expectations. Overall, the trend in Asia was bearish. WPI-based inflation rose to 4.35% for this week from 4.07% in the previous week, as per data released by the government on Friday. This was slightly higher than the market expectation of 4.11%.

Market breadth on BSE was negative, with nearly two stocks declining for every one that advanced. Surprisingly, even as the futures contracts for the current month are nearing expiry, traded turnover continues to be low.

Total turnover on both exchanges was around Rs 52,000 crore compared with around Rs 60,000 crore on Thursday. As per provisional data, FIIs net sold Rs 710 crore worth of shares while domestic institutional investors net bought

Rs 105 crore worth of shares on Friday.

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According to CNBC TV18, HDFC Bank is in advanced talks to merge Centurion Bank of Punjab (CBoP) with itself.

“…the talks are at a critical stage,” the channel reported.

“The talks are at an advanced stage and the two banks are working hard to somehow see this deal go through,” the report said, but added that it won’t be surprising if the deal doesn’t go through.

However, both the banks denied that there was any deal being worked out. In a clarification to the stock exchange, HDFC Bank said that, “at present, there is no such proposal for the consideration of the Board of Directors of the bank.”

A CBoP spokesperson termed the report “speculative”.

“It is not the practice to comment on speculative reports,” the bank said in a statement to the Bombay Stock Exchange.

A quick calculation shows that if the deal goes through, it will make HDFC the seventh-largest bank in terms of assets, ahead of state-owned IDBI, Union Bank and Central Bank of India.

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HDFC Bank’s total assets will go up to Rs 1,10,110 crore from the current Rs 91,319 crore. Its total branches will increase to more than 1,150, with 2,100 ATMs and more than 27,000 staff.

CBoP is no stranger to mergers. It has been in the thick of such action, having acquired Bank of Punjab and Kerala-based Lord Krishna Bank, the latter just in August 2007.

In fact, CBoP officials have always been bullish about the bank’s plans for more mergers. In an interview with DNA Money on February 7, Vivek Vig, the bank’s country head of retail banking, said CBoP is the only bank which has a stated policy for mergers.

“We have always said that we are open to both organic and inorganic growth. Even when we did both the mergers, we were not in talks only with them. You need to cook three for one to boil. These things take time,” Vig had said.

Rumours about CBoP are also not new. Earlier this month, there were reports that non-banking finance company Infrastructure Development Finance Company (IDFC) may merge with the bank to get a long-coveted banking licence.

However, can CBoP, which has been a hunter so far, resist being hunted? Some analysts don’t think so.

Analysts expect CBoP to be one of the takeover targets for larger banks when the Reserve Bank of India relaxes norms for foreign banks, in line with the WTO guidelines in 2009.

“The market is already talking about banks like CBoP, Yes Bank, Bank of Rajasthan and smaller banks like Dhanalaxmi and Laxmi Vilas Bank as potential takeover targets,” said an analyst with a foreign bank.

Analysts say CBoP has been one of those banks which haven’t been able to cash in, despite two mergers.

“CBoP is clearly struggling to build an asset franchise,” Macquarie Equities Research said in a note on February 14, just after talks about bank’s merger with IDFC surfaced.

“Despite having 400 branches, it has a balance sheet of only Rs 25,400 crore. HDFC Bank is five times CBoP’s size with less than double the branch network. As a result, CBoP’s cost-income ratio is at an industry high 66%. For most banks, this is at 40-50%,” the note said.

Macquarie said that CBoP hasn’t been growing as fast as it should be. “Quarter-on-quarter growth in third quarter was 36%, annualised. A bank with such a low asset/branch ratio should be growing at 45-50%,” Macquarie said.

CBoP’s highest shareholder is Bank Muscat, with 14.02%, followed by Kephinance Investment Mauritius Pte Ltd with 6.13% and HSBC Financial Service Middle East Ltd A/c with 4.71%.

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A mutual fund is made of of many investors who buy shares of the fund.
Mutual funds are a long term investment for retirement, 401k plan, etc. They give you diversification which means less risk but in the long term also means less reward.

A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, and/or other securities.These are investment opportunities offered by a finance institution which may be in the form of shares, bonds and other forms of securities.The investor buys hundreds of shares and other investments. You can participate and own a fraction of those investments. If the funds investments do well, you do well. The investor gets paid from fees, usually about 0.5 – 2% of the money invested.

Different funds specialise in differnt types of stocks. A fund manager picks those stocks and buys and sells them in order to increase the value of the fund.

The essential difference between the two is that a share has the advantage of the holder discerning market trends with respect to the specific company while in a mutual fund the investor often cannot determine the exact channels of return on investment which is the domain of the portfolio manager in charge of the mutual fund

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The primary markets advisory committee of Sebi has suggested that the face value of all new stocks should be a uniform Re 1 per share.

If accepted, the panel’s recommendations will force all new issuers to offer their shares at an affordable price because of a Re 1 par value.

Reports indicate that the Sebi board will meet in about three weeks to take a decision on the proposal.

This could be the first big decision taken by new Sebi chairman C.B. Bhave who assumed office yesterday.

If Sebi decides to clear the proposal, it will end controversies such as the one that erupted last August when Anil Ambani decided to fix the face value of the Reliance Power stock at Rs 2 and offer it to the public at around Rs 90.

After a barrage of allegations from certain quarters and intervention by the market regulator, the par value of the Reliance Power stock was fixed at Rs 10 and offered to investors in a price range of Rs 405-450 a share.

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Since this is a recommendation of the primary markets committee, it won’t immediately affect the companies that are already listed on the bourses.

However, sources say Sebi will have to decide whether to extend the concept to the stocks that are already listed on the bourses. This may take some more time to implement, sources added.

At present, there are ten denominations in the face value of listed stocks: 1, 2, 3, 4, 5, 6, 10, 20, 50 and 100.

However, the rationale for the committee’s suggestion is not to increase liquidity.

Shares of listed companies have different face values within the same industry. For example, the face value of Infosys is Rs 5 per share whereas the par value of Wipro is Rs 2. The committee wants to correct such distortions.

“Having different face values does not help the investor. He may buy into a stock without knowing its actual par value. Therefore, when there is a uniformity, it will be easier for the investor to compare stocks,” said V K Sharma, head of research at Anagram Stock Broking.

Dhiraj Sachdev, vice-president and senior fund manager at HSBC Asset Management, reckoned that the varying face values create confusion in the minds of an investor.

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On five occasions out of the 11, the market has given negative returns in the two weeks ending on budget day and out of these five occasions, the market has fallen in 3 years in two weeks post-budget. In the rest two years, the market had reversed the losses, albeit marginally, in the post-budget period. In four out of those five occasions, market had taken a hit on D-day also, thereby proving the fact that lack of positive surprises actually has an impact on overall market movement, though in short-term only.

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But experts, who believe that policy reforms are now undertaken more outside the budget than inside it, have their own implications on budget expectations. “Over the years, budget has been losing its importance as a major event that tends to have an impact on the markets in the long-run. Major reforms have been undertaken in the past budgets and since last few years, reforms tend to come throughout the year rather than being punched up in one budget,” says Jasani. According to Jasani global factors are so far nullifying the initiation of pre-budget rally.

“However, a minor pre-budget run-up could still happen closer to D-day. Also if agri-reforms are initiated this year in a big way, then markets may lighten up post-budget as it is a major segment, where effects of reforms have not yet been felt. Moreover, to sustain high growth rate, we need agri-reforms and rural infrastructure development,” says Jasani. “The market reaction to budget has always been a temporary one. This year the government will be presenting its final budget as elections are due next year. So we expect a normal budget, rather than a radical one. Therefore, this year, the impact on market will be less compared to earlier years, when reformist budgets were presented,” said Deven Choksey of KR Choksey Shares & Securities Ltd.

Choksey said since this year too the Centre’s major focus is on agricultural growth and rural infrastructure development, market players are less confident of a pre-budget rally owing to lack of major expectations for the capital market and uncertain global markets.

There have also been cases where the post-budget market run-up is contrary to the budget day movement.

This is due to the fact that the budget in itself is too long for market participants to go through in a day. The blueprint of budget, as is usually called, brings out much more details into the public arena, thereby affecting post-budget market movement.

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In a communiqué Monday to the Bombay Stock Exchange (BSE), RPL said the slide was compounded by “a vicious and orchestrated campaign of market manipulation and market abuse, unleashed by unscrupulous rival corporate interests, to hammer down all RADAG stocks”.

The statement added that this was an attempt to undermine the group’s “fair name and reputation and cause losses to million of genuine investors”.

The company said it had written to markets regulator Securities and Exchange Board of India (SEBI) seeking an investigation.

RPL also informed BSE that its board would consider a proposal Feb 24 to issue bonus shares to all categories of shareholders except the promoters.

The bonus issue would be considered “in keeping with the Reliance ADA Group’s fundamental and overriding philosophy of creating value for genuine long-term investors.

“This will include inter alia consideration of a proposal for issuing free bonus shares to all categories of shareholders, excluding the promoter group, thereby protecting investors even from notional short-term losses.

“The proposal will result in dilution of the promoter group’s shareholding in Reliance Power.”

From the time of opening of the Reliance Power initial public offer (IPO) Jan 15, the sensitive index (Sensex) of the Bombay Stock Exchange was down 13 percent. The company’s stock was down by a comparatively lower level of 11 percent from the issue price for retail investors, the company said.

Despite drawing record subscriptions, the first day of listing saw the Reliance scrip close at Rs.372 on the opening day Feb 11, with a huge discount over the issue price of Rs.450.

This had created huge resentment and disappointment among investors, who had overwhelmingly subscribed to the issue, as many expected the scrip to debut higher at around Rs.750-850 a share.

The IPO had attracted more than five million bids from all categories of domestic and international investors with aggregate commitment of over Rs.7.5 trillion ($189 billion) against the issue size of Rs.115.60 billion ($2.91 billion).

The company is currently developing 12 power projects in the country with a total planned installed capacity of 28,000 MW. This is among the largest portfolios of power generation assets under development.

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The Indian market wide NIFTY index from the Indian Stock Exchange is down 15 per cent between 1 January and 15 February compared the ASX 300 being down 12 per cent and the US S&P down 8 per cent.

But IPOs in India are recovering faster than elsewhere, so fast that the dawning economic superpower could salvage and breathe new life in the global IPO market.

“It seems India is one country saving the ailing Global IPO market with US$3.3 billion worth of proceeds from eight deals, making it the largest IPO market in the world so far this year,” said Thomson Financial’s Deals Express report.

“The bulk of volumes came from the biggest IPO deal so far this year – Reliance Power’s US$3 billion IPO last January 21.”

Thomson Financial also noted, “India garnered 49.1 per cent of Global IPO proceeds compared to just 3.7 per cent in the same period last year. A feat considering the Global IPO decline of 36.1 per cent compared to the same period last year.”

This however just confirms how slow the IPO market is looking globally. “Taking off Reliance Power’s US$3 billion IPO – Global IPO decline must have gone down by 64 per cent. Both Top Two Largest IPO markets last year, China and US, experienced declines compared to the same period last year,” said Thomson Financial.

The news gets even better for investors willing to jump back into the subcontinent. “India still has a hefty IPO pipeline to come. In fact, this week, a total of three IPOs from India is set to launch. Emaar MGF’s IPO, estimated at US$1.6 billon will be the second largest IPO in the world so far this year, behind Reliance Power’s US$3 billion IPO.”

If India is bouncing back faster than anyone expected, then why is it still so hard for planners to invest into the country? Influential planners who attended the recent Financial Standard Chief Economists Forum said that encouraging their platforms to put Indian funds onto their platforms was so difficult they were considering to go direct instead.

As far as India is concerned, maybe it’s time for wealth management to catch up with the economic reality.

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There are three investment banks in particular – Goldman Sachs, Deutsche Bank and Barclays Capital – that some Euromarket spectators would enjoy seeing taking a fall which would require them to be stretchered away by paramedics and into intensive care. There used to be four, but Société Générale spectacularly met its own internal Waterloo – have you also noticed how little sympathy there is for the French bank?

Of course, the attitude of the ghoulish spectators is based largely on jealousy. Société Générale was “too clever by half”, and how could a medium-sized French bank dominate the huge international equity derivatives sector?

Despite the revelations about Jérôme Kerviel, that equity derivatives franchise is still intact. The only question is whether Société Générale’s main counterparties will remain as loyal as before.

Goldman Sachs is involved in almost every single large public transaction, but underneath it is a trading house which lives on its risk management and trading prowess. Where it excels is in its allocation of capital resources.

Time after time it moves its own capital around at lightning speed and makes, usually but not always, correct bets, while its flat-footed competitors are left holding stale portions which produce substantial losses.

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Look at Goldman Sachs’ success in “principal” investing and shorting sub-prime. The firm’s timing may have been lucky, but it gave the impression that Goldman Sachs could walk on water and, while investment banking shares were crashing, Goldie stock rose briefly to a new high.

Not surprisingly, the ghouls groaned when Goldman Sachs paid record bonuses in one of the worst years for banking in memory.

Barclays Capital and Deutsche Bank attracted resentment because they appeared to have essentially ridden out the credit storm. The question which was immediately asked was: “How did they manage to escape with only slight bruises when Citigroup, Merrill Lynch, UBS, Morgan Stanley and Bear Stearns found themselves with broken limbs and serious internal bleeding?”

The question is valid. Barclays Capital and Deutsche Bank are the top two issuers of new bonds and they are among the most powerful players in complex credit derivatives. They pride themselves on their innovative skills, and their “rocket scientists” invented some of the more weird and wonderful structures such as “SIV-lites” that have caused such problems.

How then did BarCap and Deutsche escape the tidal credit wave that engulfed so many of their competitors? We know that Deutsche was short of sub-prime financial assets at a crucial stage of the market cycle, but Barclays Capital too must have gone on the defensive.

In particular, the market did not seem to be inclined to accept the Barclays story despite the detailed reassurances from chief executive Bob Diamond. It is still dogged by rolling speculation about massive writedowns.

The message from Deutsche Bank’s chairman, Josef Ackermann, on the other hand, was better received. Deutsche Bank has announced its fourth-quarter results, which make impressive reading, given the totally unhelpful market background. Look at these numbers in comparison to, say, Bank of America or Wachovia, or versus Citigroup, Merrill and UBS, which were forced to seek charity from rich foreigners.

As you would expect, investment banking profits at Deutsche were lower. However, on the plus side, there were no losses on structured credit products and only modest writedowns on the leveraged loan book. The dividend was increased and Ackermann is confident of meeting a pre-tax profit of €8.4bn this year.

How many other global banks would have been able to make profit forecasts in 2005/2006 and still hope that they would be met in 2008? Very few. However, that is perhaps why there was initial scepticism and may explain why the shares have been marked down so sharply. At a recent price of €75, Deutsche Bank shares have fallen 37.5% from their high of €120.

The senior management of Deutsche Bank must be wondering what they can do to convince investors, and it will be of only some consolation that other bank shares have declined by larger amounts. The German bank hasn’t had to go cap in hand to wealthy foreign funds, it is not about to make impetuous acquisitions, it is meeting its profit targets, and shareholders have watched their dividends rise steadily.

Why does the market therefore seem to mistrust Deutsche? I remember when Ackermann broke away from normal Deutsche Bank tradition by making specific profit forecasts and setting targets for the various divisions within the bank.

The reaction in the market was: “Who does Ackermann think he was trying to impress?” Market observers were quick to point out that banks such as ABN Amro had barely achieved a single profit target, so why should Deutsche, with its heavy reliance on investment banking, be any different?

The market commentators and the analysts should have had more faith. What they had failed to realise was that the new Deutsche Bank business model wasn’t flawed, despite the emphasis on investment banking, and that, in Ackermann and Anshu Jain, the bank possessed two of the most visionary leaders in the industry.

The previous business model at Deutsche Bank when Rolf Breuer was in charge, would have brought Deutsche to a standstill.

Perhaps the scepticism also stemmed from the fact that Ackermann, who is Swiss, encountered some political opposition in Germany and Jain was considered so clever that it was difficult to understand how he could be able to generate relatively stable earnings from an investment bank. In Germany, politicians and shareholders prefer the leaders of the country’s most important bank to be predictable. Ackermann and Jain were therefore perceived as outsiders.

Even when the bank started to report consistent earnings and meet or exceed profit targets, senior management was given little credit. Ackermann became a political football during the Mannesmann trial and was made a villain of the piece by large sectors of the German financial press.

The same financial press waited for Jain or his head of investment banking, Michael Cohrs, to stumble badly. Deutsche Bank shares continued to be rated poorly by the stock market.

Today, when global bank chief executives have been falling over like ninepins, the quality of Deutsche Bank’s senior management should have become more evident. Several years ago, Deutsche talked briefly to Citigroup about a merger.

This never took place – Deutsche shareholders will be happy – but late last year, Ackermann was offered the top job at Citigroup. Of course he declined, but doesn’t this story confirm that Ackermann is seen as one of the best leaders in the industry? I also suspect that Jain was approached to run Merrill Lynch.

Deutsche Bank shareholders should be grateful for the quality of their leadership. Other major banks have had to accept compromise promotions and many senior appointments which may not have been their first choice. There are gaping management holes at Citigroup, Bear Stearns, UBS and Morgan Stanley.

Some of the candidates being short-listed for these vacant positions reek of mediocrity, which may not be in the best long-term interests of the bank. Look at the state of the other German domestic banks and in many instances the senior management line-up is dire – it is a wonder that there have not been more WestLBs.

Deutsche Bank, on the other hand, can claim management consistency – Ackermann, Jain and Cohrs have been together for many years – and shareholders should value this dependability more highly. The stock market has declared war on almost all financial services shares, but the market isn’t always right and its ability to discriminate is poor.

Deutsche Bank seems to have been unfairly bracketed with some seriously underperforming competitors. Only if Deutsche was about to disappoint would such a lowly rating be appropriate, but Deutsche’s record for meeting its targets has, so far, been exemplary.

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Technology has really taken away a lot of fun from watching the stock markets in action. All you see is bleary-eyed executives sitting in front of several screens. One press of a button and a transaction is through.

Watch clips of the old outcry system and you will realise that Darwin was right. Jobbers jumping and pumping their hands with each quote, much like a group of monkeys acting excitedly in their cage. While technology has made one species of monkeys vanish, it has left several new species that need to be tackled.

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Monkeys are associated with funny faces. And this is the first monkey – “face value”. Regulations allow companies to have any face value of a share from Re 1 to Rs 10. Unless you are an experienced hand in the markets, not knowing this could land you in trouble. It’s good to hear that the regulator is soon going to put this monkey out of its evolutionary journey once and for all. Perhaps one can go further and do away with the concept of face value itself, although this will require several amendments to various statutes.

The second monkey is an unintended by-product of the demat system. Demat was introduced to ensure that fake shares do not enter the market and also to speed up transaction time. However unwittingly the system has now become a tool to bypass what was a good idea — the concept of a minimum market lot. Today many demat accounts hold total portfolios of a value below what banks will open a savings bank or fixed deposit account.

In the guise of “benefiting” retail investors, even the minimum applications for IPOs are sometimes in single digits. Such single digit shares in various demat accounts are outstanding examples of Newton’s first law — inertia — they will continue to lie there unless some external force compels movement. Retail investors need to examine whether the cost of maintaining a demat account is worth the size of the allotments they get and the profit they are likely to make. Many idle shares contribute to the lack of stocks available for trading. I wonder whether such figures are available.

The next monkey is “current market price”. What does it mean? Sometime back a PSU made a follow-on issue. The media tom-tommed it as an IPO. But the biggest surprise was the price. Before the documents were filed the PSU was quoting at about 380. Soon it slowly started rising due to “fundamental and technical reasons” (whatever that means) and reached 520. Now if this was the real value why was the issue not sold at this price? Even funnier — the market was asked to “discover” the “price” — 25% below the CMP — of a stock that was being traded continuously on the stock exchange! What greater confession do you require that the market price was rigged? Solution — a ban on book building for listed stocks.

Next, compare the price that investors pay with the net effective price that the promoters pay. It is ironic that the book-built method, which was supposed to protect investors from promoters of companies with no ‘track record’ has been subverted to extract huge premiums.

Perhaps it is time to relook at the definition of the term “track record” for those companies that have not even started operations. In the CCI era such companies could raise equity by an ‘issue at par”.

We need a variation of this rule now. How about stipulating that promoters of companies that have not even commenced operations bring in 50% of their equity in cash at the same price as “discovered” by the book-built method?

Should be interesting. Would all executives in intermediaries that enable IPOs accept 50% of their annual pay packet by way of shares in the issues they are involved in, calculated at the same “discovered” price and locked in for one year? After all they all want long-term investors, don’t they?

Let me relate two true monkey stories. A London stock analyst-cum-broker contacted the director of the London zoo for an experiment. The “brainiest” chimp was chosen. A notional portfolio of 50 of the most frequently traded stocks on the FTSE was decided, with weights.

Their names were written on separate chits. Every Sunday the chimp picked each chit one by one. After picking a chit the chimp had to throw a dart on a board divided into three segments — buy, sell, and hold. Action was taken according to whatever the chimp “decided” on each stock.

After four weeks the analyst converted the notional portfolio into a real funded one. After six months the chimp not only beat the market but also all the fund managers by a whopping 10%!

The second monkey story is slightly different. The end of an educative TV programme on stock markets showed an orangutan swinging through the Malayan forest. An orangutan is the world champion in brachial gymnastics.

The orangutan swung from branch to branch. No commentary but the soft strains of Johann Strauss’ The Blue Danube waltz wafted in the background. Every time the orangutan (literally means ‘Man of the jungle’) grabbed a branch higher than the previous one, his speed reduced.

But even without the benefit of having studied Newtonian physics, or passing a certification exam, the orangutan knew that he must regularly descend and generate the momentum required to go up again.

Surely the veiled intention behind this clip was to show that the stock markets must go down time and again if they have to go up later. And the faster/higher they go up the faster/lower they will come down. Sounds familiar in the light of recent happenings, doesn’t it? And monkeys knew this before us! If the orangutan’s path — ups and downs — were graphically represented, perhaps many technical analysts would probably have found similarities with our own SENSEX!

A last piece of information — type the words ‘monkey’ ‘stock-market’ ‘casino’ ‘lottery’ in any combination and do a Google search. You will get about two million pages of information. Read them — they are very illuminating. Since you will be spending considerable time, you will need to supplement yourself — with what? Monkeynuts!

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So, here’s the equation. Three crore rupees creates one direct job and another two jobs indirectly. You don’t have to look any further to see why the latest growth estimates look like they do.

GDP growth estimated for 2007-08 might be slightly lower than what was anticipated but that’s hardly the statistic to be worried about. The worrying number is the growth in household consumption expenditure – just above 6.5 per cent. So, an economy growing at nearly 9 per cent can’t generate consumption growth of even 7 per cent.

On the other hand, everyone reading this article must have experienced exactly the opposite in the past one year. Their consumption expenditure has surely grown faster than their income. That’s because all of us who speak in English, surf the Net and read columns about the stock markets have done well for ourselves in the past few years.

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We’ve all basked in a wealth-effect, which has given us the confidence to spend now in anticipation of future earnings. Look at your latest credit card bill and you will understand what I am talking about.

Then how did household consumption expenditure grow at such a low rate? That’s because the lower you go down the income ladder, consumption growth has been slower and slower. And below a certain level it might even have been negative.

On the other hand, the CSO’s latest estimates show investments have growing at more than 35 per cent this year. That only proves what some of us have been saying for the past one year – that the India story is largely investment-led. The stock markets have also paid rich dividends to anyone who held this view. Engineering, infrastructure, construction, mining, power stocks have been multi-baggers while anyone backing FMCG, auto, consumer durables has ended up losing money.

But here’s the danger. Investments can be of two types – public and private. Public investments are funded by taxes, PSU profits and government borrowing. Private investments are funded by corporate profits, borrowing and money raised through IPOs. So when private investment growth is five times faster than household consumption it shows the returns to capital are growing at an inordinately faster rate than the wage bill.

When that happens, additional consumption demand can only come from those who have a right over the returns to capital. That could be owners of capital, managers, people earning high interest income or getting high returns from the capital markets. When growth is not accompanied by job creation the size of the consuming class is bound to be limited. And, ultimately without consumption there can’t be any real growth.

Let’s also look at this from the supply side. To simplify matters let’s break the productive sector up into two departments. The first is a producers goods department, which includes infrastructure and capital goods. The second, a consumer goods department, which includes FMCG, consumer durables, etc. Right now, the first department is growing because of capex in both departments. But as consumption slows down capex in the consumer goods department will also slow down. That, in turn, will cause a slowdown in the producers goods department as well.

When that happens, even the existing ‘buying’ classes will start shrinking at the margins and there will be an overall decline in demand. In my opinion, we are already deep into the first stage of this down-cycle. It’s a matter of time before the second stage starts as well.

Once that happens, the RBI will be under pressure to come out as the saviour. Easy credit might give another spurt to consumption and investment, starting off another up-cycle. This is what the US Fed has been doing for the past decade or so, creating several mini-credit bubbles which all come together to make an ever-expanding mega-credit bubble.

For the first time in two decades, the establishment in the developed capitalist world – including the IMF – has started questioning this growth model. Back home, the RBI has been its biggest critic and the only central bank, which has refused to follow the Fed’s lead. Hopefully, its resolve won’t be shaken by a little slowdown in India.

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