While the forecasting models of most Indian macroeconomists, who tried to assess the COVID-19 pandemic’s impact on growth and predict the pattern of each affected nation’s economic recovery (i.e. being V-shaped or U-shaped) last year, failed on consistency, there is one trend following an unswerving pattern across India and the world – a steep rise in asset and stock prices.
Corporate earnings and profitability have been high for most listed companies, even when ‘real wages’ (incomes adjusted for inflation) have remained woefully low. Large-scale enterprises have scaled up their business investments, while smaller firms have struggled to thrive in a supply-demand constrained, pandemic-hit economy.
Zomato vs Paytm
For those in need of raising capital, most Indian enterprises have now been turning to ‘debt market’ for funds. Equity issuances during 2020-21 amounted to Rs 1.7 trillion, 23.7 per cent higher than their year-ago level of Rs 1.4 trillion. This growth, however, was dominated by a single equity issue of Rs 531 billion by Reliance Industries. This was the largest rights issue India has ever seen. A bulk of funds mobilisation through the primary capital market in 2020-21 also happened through debt instruments. Issuances of debentures peaked at Rs 8.6 trillion during the year. These were 31.6 per cent higher than debentures issued in 2019-20, of the order of Rs 6.5 trillion.
Amidst this, India’s fintech market, and the ‘app-based digital business model’, which has continued to boom, as observed in the rise of start-ups over the last few years, saw a few hyped Initial Public Offerings (IPOs) announced recently, albeit with mixed results.
Zomato, the first of a generation of internet unicorns to tap India’s capital markets, generated a ‘seldom-seen frenzy’ among the local investment community. The start-up soared more than 80% in its debut launch, following a $1.3 billion IPO.
However, for Paytm, India’s pioneering digital payments start-up, its IPO launch dream couldn’t have started on a more disastrous note.
Shares continued to plummet for a second day after its $2.5-billion IPO, marking one of the worst debuts ever by a major technology company. Its stock fell further by about 13% after three days of the launch (with a 27% plunge on its debut Thursday), cutting its market value to about $12 billion. Paytm’s parent company, One 97 Communications Ltd, raised a record IPO sum, but its disastrous trading debut sparked criticism that the company and its investment bankers had pushed too hard in the offering.
Another digital payments firm, Mobikwik, which was also planning to make an initial public offering to raise capital, has now deferred it after auditors and regulators raised questions on its prospectus.
So, what’s happening here?
The Case of the Hyper-Optimistic Investor
Noted economist Robert Shiller pointed out that a ‘Wild West’ mentality seems to be gripping the hyper-optimistic investor confidence wave in investments in equity, housing and crypto across the US, similar to the one seen during the period of the ‘roaring 1920s’.
It came right after the Spanish Flu, when a splurge in consumer spending was observed amongst higher-income groups, along with volatile saving levels amongst lower-income groups, leading up to the stock market crash that triggered the Great Depression.
It seems a similar ‘Wild West’ mentality wave can explain the sociology of markets in India, too. High-income (wealth) groups are investing and betting big on stocks, crypto and other volatile assets, even as low-income groups remain uncertain about their own future (while spending less and saving more) in a pandemic-hit economy.
Moreover, as echoed last year, a growing disconnect between capital markets and the real economy signals the formation of a bubble, or a “mania, in crisis terminology.
The substantive rise in ‘price-driven expectations’ or ‘stock prices’ can’t be explained by any logical deduction, or an objective faith in the market’s fundamentals, or by the strength of an economy’s recovery. Rather, it’s explained by the ‘irrational exuberance’ visible among investors amid short-term capital inflows from foreign institutional investors (FIIs), most of which is “hot money”, apart from those invested in form of equity-backed systematic investment plans (SIPs).
How Crypto Works: 'Technobabble' & 'Libertarian Derp'
Another illustrative case of this ‘Wild West’ investor sentiment is the ‘crypto mania’ operating as a herd-like effect amongst young Indian investors. The Indian government, now planning a Bill to regulate the private cryptocurrency market, is right to be concerned, given the extreme ‘volatile’ nature of investment in privately-manufactured digital money.
A question worth reiterating here is one that Paul Krugman asked in a recent column: “Why are people willing to pay large sums for assets (pegged in cryptocurrencies) that don’t seem to do anything?”
The answer, obviously, is that the price of these assets keep going up, so that early investor made a lot of money, and their success keeps drawing in new investors. This may totally sound like a ‘speculative bubble’ or a Ponzi scheme, in effect both meaning the same thing.
A long-running Ponzi scheme requires a ‘narrative’, and it is in this context where ‘crypto’ investments have really excelled. Look at the volume of ads during sports events and YouTube ads pushing people into investing big in crypto (and stocks).
The fuelled narrative that crypto investments are safe and extremely profitable is fed by two forms of discourse right now – enriched ‘technobabble’ (using arcane terminology to convince others that blockchain, a ‘revolutionary new technology’, is being used to issue private money) combined with an element of ‘libertarian derp’ (assertions being made since the 2008 crisis that fiat currencies, government-issued money without any tangible backing will collapse any day).
A Short-Lived Euphoria
How long the ‘Wild West’ mentality would continue to grip investor sentiment in stocks and crypto is difficult to estimate. But what is certain is the fact that it won’t go on for a very long time. Many tech-based start-ups (in fintech or app-based business models) with weak macro-financial performance may ride the wave on such sentiment, but only for a short period. Paytm’s stock-market debacle illustrated this. Other firms, too, may face the same music.
What about crypto?
Well, John Maynard Keynes called the gold standard a “barbarous relic” back in 1924, where the gold’s unique “metallic mystique and valuation” saw it always being “valued” even though it could never function as a unit of money or as a form of currency.
Similarly, a few cryptocurrencies (like Bitcoin) may also see similar longevity in their existence, unless governments across the world cooperate to ban all of these together. But that seems difficult at this point.
(The author is Associate Professor of Economics, OP Jindal Global University. He is currently Visiting Professor, Department of Economics, Carleton University. He tweets @prats1810. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)