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Chapter-5

IMPACT OF BOOM, BUBBLE & BUST IN STOCK MARKET

IN INDIA

Introduction

Definition of 'Boom'

A period of time during which sales of a product or business activity increases

very rapidly. In the stock market, booms are associated with bull markets,

whereas busts are associated with bear markets. The cyclical nature of the

market and the economy in general suggests that every strong economic growth

bull market in history has been followed by a sluggish low growth bear market.

Stocks that suddenly become very popular and gain strong elevated market

profits are the result of a stock boom. An example of this is the internet

technologies boom or "dot-com bubble" that occurred during the late '90s. This

was one of the most famous booms in stock market history. As often occurs in a

boom-and-bust cycle, this boom was followed by one of the biggest busts in

history. This occurs because the growth that takes place in a boom is rarely

maintained and backed up by actual company profits.

It has been empirically documented that the IPO marketexperiences cycles in

terms of volumes of new companies, whichis referred to in the literature as

hot and cold periods. It isconsidered to be an empirical anomaly for which

no unanimousexplanation is yet provided for. The most well-known among

thesighted explanations is technological innovation or positiveproductivity

shock that changes the prospects of IPOs from aparticular industry. Empirical

studies have found that small andyoung firms time their offers to use investors

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optimism in theirfavour and get listed during the booming period. There

areevidences of high under-pricing and industry clustering during thehot

periods, though their nature and extent have differed fromcountry to country1.

Only four countries in the world (namely U.S.A., India,Romania and

Canada)2have more than three thousand listedcompanies in their stock

exchanges. In India, during 1990s alone,3,537 companies got listed on the

Bombay Stock Exchange (BSE).

The last decade is also important, since the Indian economy ingeneral and

primary capital market, in particular, has undergoneremarkable changes duringthis period. The liberalisationprogramme initiated in 1992 along with other

changes has enabledlarge Foreign Direct Investment (FDI) and Foreign

InstitutionalInvestment (FII) inflows, giving a big push to the capital market.

The abolition of the Controller of Capital Issues (CCI) also had amajor impact

on the activities in the Indian primary market. Itwitnessed a boom phase (1993-

96) when more than 50 companiesgot listed every month. However, from end

1996 till recently theprimary market has witnessed a considerable decline in the

numberof new issues and the total amount of capital rose.

A stock market boom is caused when many investors join the market and

speculate with more funds than they did previously, leading to a sudden jump in

growth and often a jump in profits for many investors. The boom is the opposite

of a bust, where the markets suddenly collapses, and are related to each other.

The boom is caused by several things, including over-exuberance on the part of

investors.

1. Wild Optimism

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A boom has energy of its own, a snowball effect that keeps it going stronger the

larger the effect grows. Investors are spurred on by the market itself to make

increasingly larger speculations, and a general feeling grows that risks are worth

the price of making money in current positive market conditions. This wild

optimism results in a flocking to the market, especially to popular industries.

New Technology

New technology is one of the most common reasons for stock market booms.

New technology not only creates entire new industries to invest in (investors,

remembering the vast growth of computer stocks like IBM, always reactpositively to new tech industries), but also affects many other types of

businesses. If technology helps businesses improve functionality, then their

stocks are likely to increase under the hopeful eyes of investors as well.

Increase in Businesses

Another common cause of a stock market boom is an increase in businesses.

Times that see a sharp rise in the number of new businesses, or the number of

businesses that entrepreneurs decide to go public with, often coincide with a

stock market boom. New businesses mean new investment opportunities, and

the chance of some businesses to become extremely successful.

Financial Changes

Widespread

Ad financial changes also cause stock market booms, often when

governments support markets in some way. They may release funds to

bailout companies or create new tax benefits for businesses, but these

typically only lead to small increases. Booms are caused more often by

governments deregulating industries and making it easier for businessesto sell stock, start or seek funding.

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Cyclic Nature

An overarching cause of stock market booms is the cyclical nature of the stock

market. Due to many different factors, markets naturally go through booms and

busts, sometimes large and sometimes small. The seeds of each bust are in each

boom, and vice-versa. This means that the busts where a stock market falls

prepare the way for the next boom and surge of growth with new investment.

The Stock Market Boom

Although the stock market has the reputation of being a risky investment, it did

not appear that way in the 1920s. With the mood of the country exuberant, the

stock market seemed an infallible investment in the future.

As more people invested in the stock market, stock prices began to rise. This

was first noticeable in 1925. Stock prices then bobbed up and down throughout

1925 and 1926, followed by a strong upward trend in 1927. The strong bull

market (when prices are rising in the stock market) enticed even more people to

invest. And by 1928, a stock market boom had begun.

The stock market boom changed the way investors viewed the stock market. No

longer was the stock market for long-term investment. Rather, in 1928, the

stock market had become a place where everyday people truly believed that

they could become rich. Interest in the stock market reached a fevered pitch.

Stocks had become the talk of every town. Discussions about stocks could be

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heard everywhere, from parties to barber shops. As newspapers reported stories

of ordinary people - like chauffeurs, maids, and teachers - making millions off

the stock market, the fervor to buy stocks grew exponentially.

Although an increasing number of people wanted to buy stocks, not everyone

had the money to do so.

Buying on Margin

When someone did not have the money to pay the full price of stocks, they

could buy stocks "on margin." Buying stocks on margin means that the buyer

would put down some of his own money, but the rest he would borrow from a

broker. In the 1920s, the buyer only had to put down 10 to 20 percent of his

own money and thus borrowed 80 to 90 percent of the cost of the stock.

Buying on margin could be very risky. If the price of stock fell lower than the

loan amount, the broker would likely issue a "margin call," which means that

the buyer must come up with the cash to pay back his loan immediately.

In the 1920s, many speculators (people who hoped to make a lot of money on

the stock market) bought stocks on margin. Confident in what seemed a never-

ending rise in prices, many of these speculators neglected to seriously consider

the risk they were taking.

Signs of Trouble

By early 1929, people across the United States were scrambling to get into the

stock market. The profits seemed so assured that even many companies placed

money in the stock market. And even more problematically, some banks placed

customers' money in the stock market (without their knowledge). With the stock

market prices upward bound, everything seemed wonderful. When the great

crash hit in October, these people were taken by surprise. However, there had

been warning signs.

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On March 25, 1929, the stock market suffered a mini-crash. It was a prelude of

what was to come. As prices began to drop, panic struck across the country as

margin calls were issued. When banker Charles Mitchell made an

announcement that his bank would keep lending, his reassurance stopped the

panic. Although Mitchell and others tried the tactic of reassurance again in

October, it did not stop the big crash.

By the spring of 1929, there were additional signs that the economy might be

headed for a serious setback. Steel production went down; house construction

slowed; and car sales waned.

At this time, there were also a few reputable people warning of an impending,

major crash; however, as month after month went by without one, those that

advised caution were labeled pessimists and ignored.

Summer Boom

Both the mini-crash and the naysayers were nearly forgotten when the market

surged ahead during the summer of 1929. From June through August, stock

market prices reached their highest levels to date. To many, the continual

increase of stocks seemed inevitable. When economist Irving Fisher stated,

"Stock prices have reached what looks like a permanently high plateau," he was

stating what many speculators wanted to believe.

On September 3, 1929, the stock market reached its peak with the Dow JonesIndustrial Average closing at 381.17. Two days later, the market started

dropping. At first, there was no massive drop. Stock prices fluctuated

throughout September and into October until the massive drop on Black

Thursday.

Black Thursday - October 24, 1929

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On the morning of Thursday, October 24, 1929, stock prices plummeted. Vast

numbers of people were selling their stocks. Margin calls were sent out. People

across the country watched the ticker as the numbers it spit out spelled their

doom. The ticker was so overwhelmed that it quickly fell behind. A crowd

gathered outside of the New York Stock Exchange on Wall Street, stunned at

the downturn. Rumors circulated of people committing suicide.

To the great relief of many, the panic subsided in the afternoon. When a group

of bankers pooled their money and invested a large sum back into the stock

market, their willingness to invest their own money in the stock market

convinced others to stop selling.

The morning had been shocking, but the recovery was amazing. By the end of

the day, many people were again buying stocks at what they thought were

bargain prices.

On "Black Thursday," 12.9 million shares were sold - double the previous

record.

Four days later, the stock market fell again.

STOCK MARKETS: A HISTORY OF BOOM AND BUST

History is littered with stock market dips, shocks and crashes, throwing entire

economies into turmoil. With the FTSE 100 down 23% on its recent high in

2007 and a potential recession on the horizon, Dan Hyde takes a look at the

history of the stock market crash...

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The bears are back: A share trader in New York

The 1720 South Sea Bubble

Following costly British involvement in the War of the Spanish Succession, a

deal was struck with the newly formed South Sea Company to finance the 10m

British debt. Along with 6% interest, the deal also gave the South Sea Company

a monopoly on British trading in the Spanish Americas. Shares in the company

sky-rocketed as speculators spotted a real investment opportunity.

However, trade did not develop well. King Philip of Spain was unwilling to

negotiate more than three annual British voyages to the region and continuous

interruption from officials and short skirmishes with the Spanish culminated

when South Sea ships and assets were confiscated by Spain in 1718.

All the while, the shares became more and more fashionable. Investors,

oblivious to the lack of actual profit being made by the company, fell foul to

company rumor-mongering that claimed of overseas success.

In 1720, though, South Sea's house of cards collapsed. Traders finally caught on

and a mad rush to sell shares ensued, leaving a whole generation of investors

lay in ruins.

To prevent another bubble, the sale of shares was outlawed by the government.

Unfortunately, this made it difficult to start a legitimate business in Britain for

more than a century until eventual repeal in 1825 when another crises hit.

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The Panic of 1825

Britain was again rebuilding after conflict, this time the Napoleonic Wars. The

economy went into overdrive and the liberalizing of trade in Latin America

created an export boom.

Speculation was so intense that some investors even began to throw money into

schemes involving the imaginary South American Republic of Poyais. In

tandem, Bank of England allowed easy finance for the boom.

By April the boom had become a bubble at bursting point. More than seventy

banks collapsed and by Christmas, Bank of England intervention had failed to

quell a now economy-wide panic.

Stormy seas: Hogarthian image of the South Sea Company

Legend has it that the Bank of England was itself in danger of collapse until

reversing its caution and acting as the 'lender of last resort', bankrolled by

French gold.

1866 Over end, Guerney& Co.

With roots deep in Quaker East Anglia, Over end, Guerney had survived the

Panic of 1825 as the great discount bank of its time, second only to the Bank of

England in its turnover, and had since become known as the 'bankers' bank'.

After the retirement of Samuel Guerney, though, a new breed of profit-hungry

company directors expanded its core business into riskier investments such as

shipyards, railways and other long-haul investments.

The bank took short-term loans to fund risky long-term schemes, incurring

liabilities four times the size of its assets. It was a costly mistake. When several

of its creditors collapsed, the bank's share price plummeted and, in desperate

need, it was refused assistance by the Bank of England.

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Boom to bust icon: Napoleon

Over end suspended cash payments and panic spread across the country. The

bank went into liquidation in June and its directors were tried at the Old Bailey

for fraud. Other banks, now unable to find funding, also went under. With

nearly 200 companies defaulting, the ensuing depression lasted several years.

The crisis led to Walter Bagehot's famous call for the Bank of England to act as

the 'lender of last resort' preventing economy-wide collapse by providing the

last line of finance for troubled banks.How this is Money can help investorsnull.

The Wall Street Crash, 1929

Events in 1929 New York represented the most devastating shock in stock

market history.

After the difficulties of the First World War, the twenties represented a period

of peace and prosperity, revolutionized by new technologies such as cars and

radios. For those keen to take advantage, the stock market was the place to

make a quick buck and unprecedented availability led to huge numbers of

ordinary people ploughing their money into booming markets.

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But, as always, the optimism couldn't last forever and the first small dips in the

market began to appear as early as September. As fluctuation continued,

investors began to panic, selling shares in the hope of rescuing dwindling

profits. 'Black Thursday', 24 October, saw shares drop by 13%.

Some Wall Street bankers tried to inspire confidence and lift the market, buying

as many shares as possible, and it worked, at least briefly. By Monday, panic

had struck again and the 29th, 'Black Tuesday', signaled the end of prosperity

and the beginning of the Great Depression of the 1930s.

Within a few days of the downturn near universal trust had turned into universal

suspicion. Thirty billion dollars had been lost in the US alone and it took

twenty-five years for the Dow Jones to recover to pre-1929 levels. The Wall

Street Crash signaled the beginning of one of the most tumultuous periods in

world history.

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1987 Black Monday

On 19 October 1987 world stock markets experienced their largest one-day

crash in history. The falls were practically instantaneous in all financialmarkets. The Dow Jones lost 22.6% of its value and the FTSE 100 sunk 10.8%.

Reverberations from 'Black Monday' were felt across the globe.

The exact causes of the crash remain unknown: it was a moment when fear

eclipsed greed. Prolonged bull markets had prepared the ground for 'bust', but

the shock largely caught investors by surprise.

Within two years the Dow Jones had recovered and trading curbs and circuit

halters were implemented that would suspend markets before they could

collapse. Such a situation materialized for the first time in the 1997 Asian

Crisis.

The Asian Crisis of 1997

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Fears of worldwide economic meltdown were sparked when Thailand decided

to float its currency, the Baht.

After decades of outstanding economic growth in the tiger economies of the Far

East, many countries had borrowed large amounts of international capital.

Thailand's debt meant it was effectively bankrupt and severe devaluation in the

baht saw economic crisis spread to Japan, Korea and the rest of Asia.

The prospect of a complete collapse in the Korean economy, the world's

eleventh largest, led the International Monetary Fund (IMF) to step in, averting

potentially worldwide consequences. The IMF created a series of rescuepackages to restore confidence and by 1999 Asian economies had begun to

recover.

Definitionof Bubble:-

With the aftereffects of the most recent financial crisis still being felt today,

therehas been an astounding amount of public attention surrounding the

subprime mortgagecrisis and how the economy and policy makers should

respond. The idea of speculativebubbles and what happens when they burst is

interesting because it challenges the idea ofmarket efficiency. In fact, these

bubbles point to the power of investor psychology orother behavioural factors

that impact the market in a significant way.

An appropriate starting point would be to define what a speculative bubbleis.Charles P. Kindleberger defines it as a loss of touch with rationality,

something close tomass hysteria.1 Speculative bubbles have been defined as a

trend in which the price of aclass of assets is driven up compared to its

fundamental value, by the herding of investoroptimism into that particular

sector.

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While some have accused the term bubble as being overused by the media

andacademics alike, it well-characterizes the phenomenon in which hyped

investors in themarket flood into specific classes of assets, thereby driving

prices away fromfundamental values. From the tulip mania in the 17th century,

to the subprime mortgagebubble, such crises have been an ever-present

phenomenon in global economies. Whilescholars and policy makers have

strived to improve the financial system and mitigate theoccurrence of future

bubbles, they have continued to present significant challenges to theworld time

and again.

Current research of bubbles has focused mainly on the anatomy of a bubble:

inother words, the process of bubble formulation and the dynamics of a burst.

On the otherhand, the aftereffects of the bursting of a bubble have mostly been

preserved to the arenaof fiscal discussions and public policy: in other words,

how to clean up the mess. Thereare exceptions, however, including Barro and

Ursuas paper Macroeconomic Crisessince 1870 in which the authors focus

on the phenomenon of decreasing consumption(real per capita personal

consumer expenditure) after economic crises, and the lowaverage of real bill

returns observed during crises.2

WHAT CAUSES THE SLOWDOWN IN THE MACRO ECONOMY

AFTER A MARKET CRASH?

Investment

Since a drop in stock returns does not fully explain the decline in GDP

growth,particularly in the longer run, I started to probe possible other reasons

for the decline.

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While the degree of causation among each contributing factor is beyond the

scope of thisanalysis, I speculate that a decrease in liquidity and investment in

the economy caused bythe dishevelment of financial markets could be a

significant force that prolongs the effectof market bubbles.

For instance, the following quote from Kalemli-Ozcan, et al. explains

theimportance of a troubled banking sector that cannot provide credit to

domestic firms9and the corresponding slowdown in the economic productivity

during a crisis:

Liquidity decreases because domestic banks cannot provide credit. At thesame timecapital flows come to a halt and foreigners exit from the crisis

economy, so-calledsudden stops, leading to a decline in foreign credit. As a

result, the liquidity constrainedfirms cannot undertake new investment and

hence contract production.10(Kalemli-Ozcan, et. al, 2010)

In other words, a crash in the stock market could lead to a deterioration

ofinvestors availability of funds and confidence in the market, which would

then lead todecreased investment. This decreased investment would then cause

a shortage of fundsfor banks and other lenders, which would immediately mean

a decline in liquidity forfirms. The firms, then, would cut down on their capital

expenditures, thus causing aslowdown in production.

In fact, Poulsen and Hufbauer have shown that the level of foreign

directinvestment (FDI) decreases quite dramatically during a crisis, and that an

important causeof recessions after crises may be the traditional strong link

between economic growthand FDI flows.11 Figure 1 demonstrates the

correlation between FDI levels and GDPgrowth in the most recent crisis. The

figure suggests that the level of FDI and GDPgrowth becomes strongly

correlated during a crisis while the relationship is not as clearfor non-crisis

periods.

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Figure 1. FDI and Real GDP growth

(Source: Poulsen, L. (2011). Foreign direct investment in times of crisis)

Unemployment

In addition to the level of investment in the economy, data also shows that there

isa significant correlation between the bursting of a bubble and the rise inunemploymentrate with a 1-year lag and that this correlation persists for at least

three years. The lagswere calculated as the effect of the occurrence of a bubble,

measured by a dummyvariable (1 if bubble, 0 if not) and the unemployment rate

1) in the concurrent period, 2) ayear afterwards, 3) 2 years afterwards, and 4) 3

years afterwards. Table 4 shows that theimpact of a bubble on the

unemployment rate lasts longer than the impact of a bubble onGDP growth;

While the impact of a bubble on the GDP growth peaks at a year after thecrisis

and fades away, the relationship between the occurrence of a bubble

andunemployment rate is affected even three years after a crash. The results

were robustwhen country dummies were included. In the following regression,

the dummy variablewas 1 if there was a bubble in the time period observed

minus the 0, 1, 2, or 3-year lag.The dummy variable was 0 when there was no

bubble during the previously mentionedtime frame.

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Table 4.Results of the regression:unemployment%tt+1 =dummy + c

Irrational exuberance: Martha Lane Fox, who floated lastminute.com at

the peak

During the 1990s, the surging popularity of the internet and computer

technologies, seen as the future of business and trading, culminated in

disappointment in 2000/01. Speculative investment in internet firms, many of

whom put growth before profit, backfired spectacularly as the market became

saturated with dubious business plans and practices.

Failing companies with plenty of investment but no profits to show for it

triggered the mass sale of shares. Huge numbers of investors and firms who had

wanted a part in the booming sector faced large losses. A mild recession was

triggered in some countries with many left jobless and the Federal Reserve

forced to cut rates to stem the tide.

Many economists and commentators argue that it was the Fed's drastic rate-

cutting that helped pump up the next bubble in property, which has been the

central plank for the current credit crisis and stock market woes of 2008.

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The main stock market index the Bombay Sensex is up 79.6% year-to-date. Is

this astonishing rise justified by fundamentals in the economy or is the Indian

stock market forming another big bubble? In this post let me present some

points to indicate that the stock market in India is in fact forming a bubble that

is not sustainable.

One of the main reasons the US economy collapsed recently is the long-term

explosive growth of the financial sector. In the past few decades the US

economy was mainly driven by the financial sector. The FIRE economy was

comprised of Financial, Insurance and Real Estate sectors. Historically the

financial industries that included banking, investment banking performed the

simple function of lending and deposit-taking and channeling capital from

investors to companies that needed them. They acted as a middle man offering a

valuable service and earned a percentage of the transactions involved. Similarly

the real estate industry was a boring industry that comprised of mainly building

and selling homes to people that could afford them. The insurance industry also

concentrated on offering auto, home and other insurance services to customers.

However all the traditional roles were abandoned in the past few decades as

companies evolved into high profit making machines in a short time with

strategies involving high-octane risk taking. As the financial industry became

the main driver of the US economy, other sectors that constituted the real

economy such as manufacturing lost their significance.

The dramatic rise of the importance of the financial industry can be seen in the

following chart:

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Source: TheAtlantic.com

Writing in The Atlantic in an article titled The Quite Coup Simon Johnson

noted:

From 1973 to 1985, the financial sector never earned more than 16 percent of

domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s,

it oscillated between 21 percent and 30 percent, higher than it had ever been in

the postwar period. This decade, it reached 41 percent. Pay rose just as

dramatically. From 1948 to 1982, average compensation in the financial sector

ranged between 99 percent and 108 percent of the average for all domestic

private industries. From 1983, it shot upward, reaching 181 percent in 2007.

Thus the financial sectors profit alone was an incredible 41% of total domestic

corporate profits in the past decade. As a result of this growth, compensation

levels in the industry sky-rocketed to astronomical levels. During this bubble

period, MBAs were minted by the thousands and any college graduate wanted

to work in Wall Street or the banking industry and make millions.

The financial sectors GDP share also increase significantly in the period from

1990 to 2006. In the US, it increased from 23% to 31%, a full 8 percentage

points. In the UK, it was more than 10% but in France and Germany it was only

http://topforeignstocks.com/wp-content/uploads/2009/10/us-fin-growth.gif

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in the 6% range. The chart below shows the growth of the share of the financial

sector in GDP for select advanced economies since the mid-80s.

Source: How might the current financial crisis shape financial sector regulation and structure? Bank

of International Settlements (BIS)

Alan Greenspans cheap money provided fuel to the fire culminating in the

formation of the credit bubble. Once the bubble was popped in late 2007, the

US economy and indeed the global economy went into a tailspin. The financial

sector saw the collapse of many formerly solid and reputed firms like Lehman

Brothers, Bear Stearns, Washington Mutual, IndyMac Bank and many others.

The wrongfully named real estate proved to be a fake sector ending in the

foreclosures of millions of homes and thousands of empty shopping malls and

office buildings in the commercial space. In the insurance industry other than

http://topforeignstocks.com/wp-content/uploads/2009/10/us-gdp-growth.gif

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AIG no major failures happened since insurance is one industry that is highly

regulated and is controlled by the individual states. AIGs collapse was caused

not by its insurance arm, but by its tiny financial division which played big in

the derivatives market. The financial and real sector that triggered the global

economic crisis was responsible for the millions of jobs that vanished

overnightworldwide and trillions of dollars in wealth that were wiped out. In a

nutshell, the so-called FIRE economy burned the US economy very badly.

So by now you are wondering what does the above have anything to do with the

Indian economy. Well there is a lot in fact when we compare the US and India.

Similar to the US, where the financial sector became a major part of the

economy, the banking sector and insurance sector is growing to be a big part of

the Indian economy.

http://topforeignstocks.com/wp-content/uploads/2009/10/india-gdp-share.JPG

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The banking and insurance sector contributed less than 11% in 1990. In 2007 it

amounted to about 15%. While it is still less than the growth of the financial

sector in the US, it is still a cause for concern. The financial sector is growing

rapidly in India and is fueling various speculative bubbles including the real

estate bubble.

A few of the other factors that are inflating the bubble in India include:

1. From its March low of 8,160 the Sensex closed at 17,326 on Friday for a gain

of over 100%. In the past few months Foreign Institutional Investors (FIIs) have

poured at least $1B monthly in the Indian market pulling it all the way to 17K+levels in just 6 months. While a billion $ is not much in a developed market like

the US or in Europe, it has a lot of weight in emerging markets like India where

most stocks do not have high trading volumes. Hence it is easy to move the

market one way or the other with large bets.

Source: Frontline

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The current P/E of the market is over 21.The fundamentals of the economy does

not support this growth in the market. When foreign investors pulled out nearly

$12B from the market the bottom fell out. Now they have poured in around $9B

till September this year.

2. Due to political interference India does not have the capacity to absorb all the

foreign capital flowing into the country. This is especially true with Foreign

Direct Investment (FDI) where land acquisition for factories is a huge problem.

According to a BusinessWeek article Whats Holding India Back some $98

billion in investments by business is on hold due to farmers unwilling to sell

land for industrial purposes.

3. Corruption at all levels is another drag on the economy. From petty

government office clerks to high level multi-billion dollar military deals,

corruption is common. Transparency International ranks India number 85 in its

annual corruption perceptions index.

4. The Real Estate sector is the largest bubble India has ever seen. Prices of

ordinary house, apartments and even land have skyrocketed in the past few

years. Speculators play the real estate market like Americans did up until 2007.

5. The IT sector is given too much importance when in fact it employs a tiny

percentage of the working population. Despite the foreign exchange the IT

industry brings into the country, the IT industry is just considered as a cheap

labor source for foreign companies looking to save money. Many domestic

Indians do not trust in the IT sector helping in the development of India.

6. Exports are down at the annual rate of 20% thru September this year.

Domestic consumption cannot replace the fall in exports to overseas markets.

7. In addition to the foreign capital, the majority of the current growth is coming

from government spending thru stimulus plans. The government borrows

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heavily to fund the expensive stimulus plans. Once the spending is over growth

will slow down to a trickle.

8. Stocks are rising to sky high levels without strong fundamentals. Many stocks

jump double digit percentages in a week like during the dot-com bubble era in

the US. Speculation is rampant with many investors trying to make a quick buck

as the market keeps going up. After last years dramatic fall, irrational

exuberance has returned to the Indian markets.

9. The lack of a vast bond market, forces many investors to invest in the equity

market which pushes prices to abnormal levels.

The Latest Crisis

Stock index returns:

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25/26

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(Source: Yahoo Finance)

Unemployment rate:

(Source: World Bank)

The graphs show that, even though the S&P 500 started to

recover in the first quarter of2009, unemployment was still

rising until 2010. This trend is consistent with the findingsfrom

this paper. In addition, while per capita GDP decreased from

2008 to 2009, it hadstarted to recover from 2009 to 2010.

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1Kindleberger, Charles. Manias, Panics, and Crashes: A History of Financial Crises. pp 38

9 Kalemli-Ozcan et al. What Hinders Investment in the Aftermath of Financial Crises:

Insolvent Firms or Illiquid Banks? (2010)

10Kalemli-Ozcan et al. What Hinders Investment in the Aftermath of Financial Crises:

Insolvent Firms or Illiquid Banks? (2010)

11

Poulsen, L., Hufbauer, G. (2011). Foreign direct investment in times of crisis.