Choked by Clean-up Overdrive?


Recently, it has dawned on many seasoned investors that the Govt’s corporate cleanup drive may have an underestimated (and unanticipated to some extent) second and third order negative impact on the economy. It is now gradually being discovered that such a drive has choked the economy quite severely. For long time the economy was solely depending on private consumption and govt. investments for its growth. Even those cylinders have started sputtering now, leave alone the long-gone story of private capex.

With Govt. not letting its hands off the handle, does the clean-up overdrive risks killing the economy in the short-term? Tightening the noose on rating agencies, calling for bans on audit firms, penalizing bankers for past lending decisions and choking the corporates on compliance etc. are great long-term measures, but could be painful in the short-term for the economy as the entire financial eco-system recedes into risk-averse mode. Govt. needs to tread this path carefully because one does not want to see this corporate catharsis end up killing the patient i.e. economy.

Having said that, the long-term structural impact of this clean-up drive, equally shouldn’t be underestimated. The payoff will be huge, once we are through with the short-term pains. Imagine the multifold gains that will gush from improved corporate governance or more vigilant audit/ rating agencies or from prudent lending or enhanced tax compliance etc. The positive impact on long-term cost of money, macro metrics like fiscal and current account deficits etc. will be manifold to put the economy in a higher growth orbit. There is hardly any debate on that argument.

Coming to the short to medium term, there is a huge disconnect between what the market is pricing-in and what the actual growth is going to be. In the broader space, market is almost pricing-in a depression kind of scenario while the growth will still be near 7% for this year and the next. This disconnect in stock prices will get bridged at some point of time, though “when” will continue to be a question mark. Seasoned investors understand that India disappoints both optimists and pessimists equally (to quote the famous phrase of Ruchir Sharma). Time to disappoint the pessimists is not very far away!!

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