The Babu and The Market
What is a Babu?
A Babu is an Indianised term for a government official. In recent times, it has taken a disparaging connotation -- for someone who is slow and inefficient. Here is how The Webster Dictionary defines it.
There is a general consensus that excessive bureaucracy was to blame for India's slow growth since Independence in 1947 to the early nineties. But how exactly, does any inefficient bureaucracy stymie growth?
The answer is surprisingly complex. What a lethargic bureaucracy does is increase the government deficit. This in turn, causes interest rates to rise. In other words, borrowing costs for corporations also rise. [Lot of macroeconomics deleted to come to this conclusion]
Thus a corporation that intends to borrow money for buying expensive equipment might put off this decision till later. Corporations that are already paying interest might pay higher amounts due to higher rates(not dissimilar to a variable rate student loan).
Therefore their net income(income - costs) drops, as costs increase. Thus the stock price (P/E * net income) also drops, as does the overall stock market.
This is an oversimplifications, but it gives you an idea why the voting in of a socialistic/left-leaning government is accompanied by a drop in the stock market.
Namaste
posted by Dev at 6:29 PM
1 Comments:
I think your post has made some good points. But maybe, you also want to consider that one of the reasons why there was a drag on businesses when the government bureaucracy increased was because of the tariffs and unneccessary requirement of licences, as they called it the "license raj". I believe that this placed a bigger drag on business than the inefficient bureaucracy. The government is different now, however corruption and bureaucracy are still rife in the Indian government. However, the environment for trade has gotten a lot more easier for companies now which is why we see Indian companies doing a lot better.
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