The stock market debut of Reliance Power Ltd (RPL) was a debacle. The share issue of the power company, which made India’s largest ever public offering of $3 billion (Rs11,900 crore), was oversubscribed 73 times. The shares opened for trading on 11 February and after a brief opening spurt fell by the end of the day to Rs372.3, 17% discount to the initial public offering (IPO) price of Rs450.
Two other IPOs, for Wockhardt Hospitals Ltd and Emaar MGF Land Ltd, were pulled last week. The collapse is a sign that liquidity in the country is tightening sharply. That is a bad sign for the economy.
There was certainly plenty of liquidity about in mid-January, when the applications for Reliance shares were made. The IPO received $220 billion of subscriptions, the equivalent of 23% of India’s M3 measure of money supply. But then M3 had grown by 24% in the preceding year, far above the 6% inflation rate.
The heavy oversubscription would normally lead to a substantial “pop” in first-day trading, since allotments were a tiny fraction of original demand. That didn’t happen.
The fall capped a weak month in the Indian stock market. The Bombay Stock Exchange’s benchmark sensitive index, the Sensex, closed at 16,630.91 on 11 February, down 22% from its all-time high of 21,206.77 reached on 10 January.
The best explanation is monetary. Like past Indian economic booms, this one could be ending in a liquidity squeeze.
The Union and state governments together run a large budget deficit, while the balance of payments is rarely more thanmildly positive. In effect, foreign funding plays a big role in the boom. If outsiders’ enthusiasm for Indian investmentswanes, liquidity in the Indian financial system dries up very quickly. The result is a financial crunch and a period of much slower growth.
India had a gross domestic product (GDP) of $895 billion at market exchange rates in 2007. Since the combined Union and state budget deficits currently total around 8% of GDP, and Central spending is increasing by 22% annually, India may again be entering such a period.
But the news is not all bad. Prosperity in India has spread so far, and world confidence in India has increased so much, that foreign direct investment and domestic economic momentum should carry India safely through any short-term downturn.