The Cool-Cab indicator

The Indian economy is on a roll, ask the Bombay taxi driver.

Cool Cabs are the electric-blue, air-conditioned taxis that were introduced in Bombay about five years ago. Unfortunately for the taxi-owners, by the time people got hooked to the comforts of the cab, recession struck, asset prices crashed and Bombay felt it the hardest. Brokers, lenders, bankers, who would have taken the cab on their journeys home to the suburbs, opted instead for car pools —shared non air-conditioned taxis —and even went back to travelling by train.

All that has begun changing again. " Tezee (speed) has returned," said a Cool Cab driver recently. "Just when I had given up and was thinking of changing my taxi from A/C to non A/C, good times are back."

Drivers must thank the Bombay Stock Exchange, which has managed to turn around a lost cause with an unprecedented surge in stocks over the last few months. Economists, policy makers, advisers and columnists might debate the "essentials of a sustained economic recovery", but for both the stock exchange and the Cool Cab driver this boom is here to stay. So what has happened and why is the stock market ignoring pronouncements of Wise Men?

Recessions are good in the long term, and that is the lesson stock markets have learnt from the US economy. The recent resilience of the US economy is in large part directly attributed to the chastising depression  of the early 1990s. Recessions force companies to pare down, cut capacity, improve productivity, and overall make better utilisation of scarce and expensive capital. Unproductive assets change hands as small and unviable units get swallowed up by bigger ones. In India, most of this process has just been set in motion, and in a few more years, industry will see the benefits of productivity improvements.

The recession was hard and as the Cool Cab driver said, "It questioned the whole idea of being in a city like Bombay." Stocks were punished and investors fled. "There were no takers for the simple black and yellow cabs, forget our blue ones. And even if I did manage to get a ride, they would ask me to switch off the air-conditioner and charge them normal fare."

The recession has been blamed on the crash in world commodity prices, and the government's failure to provide basic infrastructure uninterrupted power, wagons, roads, consistent policy — for Indian industry. This oversight hurt at a time when world commodity prices went on a tumble. The big Indian companies, which manufacture commodities like cement, steel, aluminium and polymers, reported sharp drops in earnings and this sent stocks on a deep, depressing downslide. Infrastructure bottlenecks worsened the situation because it meant that companies had to pay extra for delays, locking up precious capital. Jobs, particularly in the service sector, were put in jeopardy, and as stock and property prices declined, individual wealth began to erode and there were cutbacks in spending.

Increasing commodity prices (spurred by a South Asian recovery) provided the impetus for good times. As the fortunes of some of India's largest companies are related to commodity prices, stock prices of these companies suddenly began looking cheap, especially when compared to other companies in the region. The buying spree in the stock market began with the foreign investor who had thus far stayed away simply because Southeast Asia looked better than the Subcontinent. Curiously, the fact that it is a caretaker government in charge in New Delhi was cited as a positive factor! "They can't spring any surprises on us now," said a foreign institutional investor.
Low interest rates meant that improved liquidity now started trickling back into stocks. Economists and other fortunetellers, however, say that this is not enough proof, and that there are yet no signs of a "recovery". They cite low credit off-take, poor bank balance sheets and infrastructure bottlenecks. But the fact is the stock market keeps surging. Who then is making the mistake, the investors or the economists?

The Cool Cab driver believes that the brokers and investors he carries home every day know what they are talking about. "They say 'one stock, it will go up and it does'!" he said. "These guys know what they are talking about." He is right. Stock bro-kers seldom miss an opportunity. They might overdo the asset price surge or they might overkill a slump, but they know when they see a recovery. And this time, they think they have seen something good and lasting.

Analysts will provide a thousand post facto justifications like "realignment of foreign portfolios to give increased weight to Subcontinent stocks", but the bottomline is that Indian companies have begun the painful process of turning the corner, and it was only a matter of time before someone saw that. If you are an investor then don't worry about jellyfish economists, this is the time to hit the sea running. Kargil and the threat of war is holding the market back, and as soon as that stand-off is resolved, the markets will really take off.

This time next year you as an investor will not regret your decision, by then Indian companies will start showing the results of productivity improvements. The stock markets now are adjusting for next year's results. Cool Cab s are never wrong, their air-conditioners are now purring.

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Himal Southasian