India’s Jobs Problem: No One Sells Pakodas In Front of Your Office?

So, India does not have a jobs problem. We are generating enough jobs and everybody is living happily ever after.

Or so seems to suggest a new study carried out by Soumya Kanti Ghosh, Chief Economic Adviser at the State Bank of India and Pulak Ghosh, a Professor at IIM Bangalore. The study uses data from Employees Provident Fund Organisation (EPFO).

In a column in The Times of India, the authors write: “Based on all estimates, we believe that 7 million formal jobs are being added to payroll on a yearly basis.”

This new study has caught the imagination of the media and the politicians in power and is being flagged all around. If seven million jobs are being created in the formal sector every year, India does not have a jobs problem. The informal sector does not have to register with the EPFO. Informal sector is that part of the economy which is not really monitored by the government and hence, it is not taxed.

The informal sector in India, up until now, has been creating a bulk of the jobs. There are various estimates available on this. Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital wrote in a recent research note: “India’s informal sector is large and labour-intensive. The informal sector accounts for ~40% of India’s GDP and employs close to ~75% of the Indian labour force.”

The Institute for Human Development, India Labour and Employment Report, 2014, points out: “An overwhelmingly large percentage of workers (about 92 per cent) are engaged in informal employment and a large majority of them have low earnings with limited or no social protection.”

As the Economic Survey of 2015-2016 points out: “The informal sector should… be credited with creating jobs and keeping If unemployment low.” If seven million jobs are being created just in the formal sector, imagine what must be happening in the informal sector. Firms and individuals operating in the informal sector, must be falling over one another to recruit people for jobs they have on offer. But is that really happening?

As I have mentioned in the past, 12 to 15 million Indians are entering the workforce every year. And given that seven million jobs are being created just in the formal sector, the individuals currently entering the workforce must be having a ball of a time, with so much to choose from.

Of course, all this goes against what I have been writing all along about India having a huge jobs problem and the fact that India’s so called demographic dividend is being destroyed. But it also goes against a lot of other data that is on offer.

Jobs are created when companies invest and expand. Let’s first look at the investment to gross domestic product (GDP at constant prices) ratio of the Indian economy. This ratio as I have written in the past has been falling for a while now. Take a look at Figure 1:

Figure 1: 

As is clear from Figure 1, investment as a part of the overall economy (represented by the GDP) has been falling over the years. How are seven million jobs being created in this scenario? In fact, let’s take a look at the incremental investment to incremental GDP ratio, over the years, in Figure 2. This basically plots the ratio of the increase in investment during the course of a year, against the increase in GDP during that year.

Figure 2. 

The incremental investment to incremental GDP Ratio between 2013-2014 and the current financial year (2017-2018) has varied between 8-25 per cent. India seems to have discovered a new economic model of creating jobs without a pickup in investment, i.e., if seven million jobs are indeed being created every year.

Companies tend to expand when they are unable to meet the demand from their current production capacity. The Reserve Bank of India carries out capacity utilisation surveys of manufacturing firms every three months. The latest survey for the period April to June 2017, found that capacity utilisation stood at 71.2 per cent. In fact, capacity utilisation has varied between 70 and 72 per cent for a while now.

As economist Madan Sabnanvis writes in his new book Economics of India-How to Fool all People for all Times: “The capacity utilisation rate has gotten stuck in the region of 70-72 per cent which means two things: first demand is absent, and second, even if it does increase, production can be scaled up without going in for fresh investment.”

The question is how are jobs being created without expansion?

In fact, the data from Centre for Monitoring Indian Economy suggests that new projects announcement in the period of three months ending December 2017, came in at a 13-year low. Take a look at Figure 3.

Figure: 3 

The new investment projects announced during the period of three months up to December 2017, were the lowest since the period of three months ending June 2004. This is a clear indication of the fact that the industry is not betting much on India’s economic future because if they were they would be expanding at a much faster rate and announcing more investment projects than they currently are.

The industrialists may say good things about India in the public domain and in the media, but they are clearly not betting much of their money on the country. And this brings us back to the question, if the industry is not investing, how are jobs being created?

Let’s take a look at the money lent by banks to industry, in Figure 4.

Figure 4: 

The bank lending to industry has been falling over the years. In fact, lately, it has been in negative territory, which means that the overall bank lending to industry has contracted.

This means that on the whole, banks haven’t lent a single new rupee to industry, lately. And that is another good example of industries not expanding. This brings us back to the question: how are seven million formal jobs being created then?

One argument that can be offered against Figure 5 is that over the years many corporates haven’t been borrowing from banks to meet their funding needs. This is true. But this is largely limited to large corporates. Global experience suggests that jobs are actually created when micro, small and medium enterprises expand, and become bigger. In order to do that, they need to borrow.

How does the scene look when we leave out large corporates? Let’s take a look at Figure 5.

Figure 5: 

Bank lending to micro, small and medium enterprises, has been in negative territory for a while now. This basically means that the overall lending to these enterprises has contracted and not a single new rupee has been lent by banks to these firms. How are these firms investing and expanding and creating jobs?

Of course, manufacturing is not the only sector creating jobs. The services sector creates a huge number of jobs of India. One of the biggest job creators in the services sector are real estate companies, which are currently down in the dumps. The construction sector is also a heavy job creator, but with real estate being the way it is, construction is not doing too well either. The information technology sector is looking to shed jobs at the lower end, with robots taking over. Tourism was never a heavy employer of people, in the formal sector, which is what we are talking about here.

Arvind Panagariya, who was the vice chairman of the NITI Aayog, until August 2017, maintained during his tenure, that India was not creating jobs, because India’s entrepreneurs were not investing in labour intensive activities.

In fact, on August 25, 2017, a few days before his tenure ended, Panagariya said“The major impediment in job creation is that our entrepreneurs simply do not invest in labour intensive activities.”

This becomes clear from India’s exports. If one looks at labour intensive exports like textiles, electronic goods, gems & jewellery, leather and agriculture, exports have more or less remained flattish over the last few years. (For a detailed exposition on this, you can click here). So, how are jobs being created with exports remaining flat in labour intensive sectors? Further, if we do believe that seven million jobs are being created every year, then was one of the main economic advisers to the prime minister, wrong all along?

Also, if so many jobs are being created, why does India have so much underemployment. Take a look at Table 1.

Table 1: Percentage distribution of persons available for 12 months based on UPSS approach 

What does Table 1 tell us? It tells us that in rural India, only 52.7 per cent of the workforce which was looking for work all through the year, actually found it. 42.1 per cent of the workforce found work for six to 11 months. If there are so many jobs being created, why are these people finding it difficult to find work all through the year, is a question worth asking. Further, if so many people are finding jobs, why has economic growth slowed down over the years. Are these people earning and not spending money? Also, if there are so many jobs going around, why have the land-owning castes across the country been protesting and demanding reservations in government jobs. Is there an explanation for that?

In the end, there is way too much evidence against not enough jobs being created. Trying to brush that aside, on the basis of a shaky study, will do the nation way too much harm. As I keep saying, the first step towards solving a problem is acknowledging that it exists, otherwise there are enough people selling pakodas, bondas, sandwiches, timepass and what not, outside our offices. But that doesn’t really solve the problem.

Postscript: In order to understand the basic methodological flaws in the study carried out by Ghosh and Ghosh, I suggest you read this.

In order to understand the basic problems in using EPFO data to estimate jobs, I suggest you read this.

The column originally appeared in Equitymaster on January 22, 2018.

Selling Air India Will Be a Real Test for Modi Govt

The government owned airline Air India has been losing a lot of money over the years. Take a look at Table 1, which lists out the losses of the airline over the last few years.

As can be seen from Table 1, over the last seven financial years, the airline has made losses of Rs 39,535 crore. Over the years, many experts have attributed different reasons for the airline doing so badly. While we can keep debating about these reasons, what is more important is that the government stops supporting the airline now and use that money in other more important areas like education, health, agriculture etc.

Table 1:

Air India Losses (in Rs crore)
Total Losses39,535

Source: Public Sector Enterprises Surveys and Loksabha Questions PDF 

In 2012, the government had approved a turnaround plan for Air India. It entailed an equity support of Rs 30,231 crore from the government, over a period of ten years. Of this amount a total of Rs 26,545.21 crore had already been released by the government to Air India, as of December 2017. Given that the airline continues to lose money, it is important that the government stops investing more money in the airline.

As on September 30, 2017, the airline had a total debt of Rs 51,890 crore. Of this working capital loans amounted to Rs 33,526 crore. A reasonable question to ask here is why are the working capital loans of the airline so high? Given that the airline has been making huge losses over the years, it has needed loans to keep afloat.

The next question is why have banks lent money to an airline which has lost so much money over the years? The answer lies in the fact that lending to Air India, is like lending to the government and governments typically don’t default on the money they borrow. (At least that is what the financial markets tend to assume most of the time).

Also, in order to keep repaying working capital loans over the years, the airline has had to take on more loans. Of course, the only institution which can keep taking new loans to repay old loans, without being questioned, is the government.

To its credit, the Narendra Modi government has initiated the strategic disinvestment plans for Air India (strategic disinvestment is a government euphemism for privatisation). In May 2017, the NITI Aayog recommended the disinvestment of Air India and its subsidiaries. In June 2017, the Cabinet Committee on Economic Affairs (CCEA), gave an in-principle approval for considering strategic disinvestment of Air India and its five subsidiaries.

Further, last week the government allowed 49 per cent foreign direct investment in Air India. This means that foreign airlines can now team up local players to buy the airline. Up until now, foreign airlines were allowed to buy up to 49 per cent of a local Indian airline, but this wasn’t allowed for Air India.

There are a number of issues that still remain and need to be handled smoothly and successfully, if Air India has to be sold.

1) The airline has a debt of close to Rs 52,000 crore. No airline is going to buy Air India along with this debt. The CCEA which gave an approval to privatise the airline in June last year, also decided to constitute an “Air India Specific Alternative Mechanism (AISAM) to guide the process on Strategic Disinvestment of the same.”

As the minister of state for finance Pon Radhakrishnan told the Lok Sabha in a written answer in December 2017: “AISAM decided for creation of a Special Purpose Vehicle (SPV) for warehousing accumulated working Capital Loan not backed by any asset along with is four Subsidiaries, noncore assets, painting and artifacts and other non-operations assets of Air lndia Limited.”

This basically means that in order to sell Air India, the government is ready to take on the working capital loans of Air India.

2) If the government is ready to take on the working capital loans of Air India, amounting to Rs 33,526 crore, then the unions of Air India might have a question or two for the government. As a Business Standard report points out: “The Air India unions have represented to the government that if the government writes off the Rs 30,000 crore debt, which is the key to the financial problem, there is no justification to privatise the airline. Surely they will not take it lying down.”

It remains to be seen how does the Modi government handle the nuisance value of the trade unions.

3) Further, Air India has aircraft loans of Rs 18,364 crore. It remains to be seen whether prospective bidders for the airline would want to start their business with loans of more than Rs 18,000 crore. If they do take on this debt, the price they will be ready to pay for the airline won’t be very high. It remains to be seen if this will be acceptable to the government, which tends to treat its ownership in public sector enterprises as family jewels (By government I mean any government and not just the current one. This attitude of treating public sector enterprises as family jewels has cost the nation so much. But that is a topic for another time and another day).

One way to handle this would be to handover Air India to another airline or a company, at a nominal price, on the condition that they take over the debt. The Business Standard report quoted earlier points out: “Look at how the government in Malaysia sold the debt-ridden Air Asia to Tony Fernandes at just one ringgit, and he took over the debt. That has to be the approach because you are not going to make money for your disinvestment target through the Air India sale.” This makes tremendous sense, but given the family jewels point, I am not sure how realistic it is. Also, in this case, the government can retain some minority stake in the airline and if and when the airline starts to do well that stake can be encashed (Precisely like it did in case of Maruti).

4) Most importantly, what happens to all the employees of Air India. As per the 2015-2016, annual report of Air India, the airline had 19,285 employees (this does not include the people working for its subsidiaries). While, the airline seems have the right number of pilots and air crew, it is particularly bloated when it comes to maintenance and ticketing and sales divisions.

A December 2017 report in the Mint points out that the airline had 5,931 employees in its maintenance division and 4,221 employees in its ticketing and sales division. In comparison, Indigo, had 739 and 69 employees in these divisions, respectively.

It remains to be seen how does the government handle this. Any airline which wants to acquire Air India is not going to employ 4,221 employees in the ticketing and sales division.

That much is very clear.

So, what happens to these and other employees? “Various options are under consideration to protect the interests of the employees,” civil aviation secretary R N Choubey told PTI. Last week, minister of state for civil aviation Jayant Sinha had told CNBC TV18, “We will make every effort to protect Air India staff.”

In an answer to a Lok Sabha question, Sinha denied any plans to offer a voluntary retirement scheme to around 15,000 employees of Air India, before the disinvestment of the airline.

Handling the employees of Air India, will be the most significant challenge for the government in the run-up to the sale. In the past, when government owned airlines have been sold in other parts of the world, the number of employees working for the airline has come down considerably, for the airline to be viable for the firm buying it.

Once we consider all these factors, the privatisation of Air India will be a real challenge for the Modi government. I sincerely hope that they are able to push it through and the money thus saved is better spent somewhere else. Also, once Air India is privatised, the chances of the government getting out of many other businesses, will go up dramatically.

The column appeared originally on Equitymaster on January 15, 2018.


Why Income Tax Will Stay

Every year, before the annual budget is presented, suggestions are made to scrapthe income tax paid by individuals. The economist/politician Subramanian Swamy has also said so in the past. The logic typically offered is that the individual income tax forms a very small part of the total taxes collected by the government, and hence, it should be scrapped.

Let’s look at Table 1, which

Table 1:

Assessment yearIndividual income tax as a proportion of total taxes collected by the governmentIndividual income tax as a proportion of GDP

Source: Author calculations on data from 1 has data up to assessment year 2015-2016. Income tax for the money earned in the financial year 2014-2015, would have been paid in the assessment year 2015-2016. The budget documents of the government of India do not list out the total income tax paid by individuals, separately. Hence, the latest numbers for the total income tax paid by individuals, isn’t available in the public domain.

These numbers are separately declared by the income tax department, on a non-regular basis.

What does Table 1 tell us? It tells us that the income tax paid by individuals, forms a small portion of the total tax collected by the government, during any given year. This is the logic offered by those who say that individual income tax needs to be scrapped. More than this, once the taxes are scrapped, people are likely to spend the money not paid in the form of income tax, in various ways. They might decide to go on a holiday or redo the house or go out and eat more often.

Hence, when this extra spending happens, the incomes of many other people will go up and they are also likely to spend more as well. Thus, the multiplier effect will work. This will ultimately benefit businesses, which will make higher profits, and hence, pay more income tax on their profits. Further, the government is also likely to collect more indirect tax. And net net, scrapping income tax for individuals won’t make much of a difference, for the government.

Also, this is likely to force the government to cut down on frivolous expenditure. It is also likely to force the government to get rid of many loss-incurring public-sector enterprises, which continue to bleed. Basically, it will force the government to cut down on what I have been calling Big Government in many of my previous pieces.

All this makes perfect sense, but in theory. Now let’s take a look at Table 2, which basically lists out individual income tax in rupee terms.

Table 2:

Assessment yearTotal individual income tax (in Rs crore)

Source:, income tax from individuals, might look very small as a proportion of total taxes collected by the government, but the absolute amounts on their own are not small at all. In fact, let’s take a look at the assessment year 2015-2016. The total income tax from individuals during this year stands at Rs 1,88,031 crore. This money is enough to finance the budget of many departments of the government of India. And this is money that the government is collecting for sure.

If the government scraps this, where will it get this money from? By now, the income tax paid by individuals must have easily touched Rs 2,50,000 crore. As supporters for scrapping individual income tax point out, the government is likely to earn more money from corporations paying higher income tax on their higher profits. Also, it is likely to collect more indirect tax as people end up spending more money.

The word to mark here is likely. No government is going to want to take such a big risk. Every government likes some amount of certainty when it comes to the taxes that it collects. Also, it has been suggested that if scrapping income tax for individuals is not possible, income tax can be done away at the lower levels of income.

This is where things get even more interesting. Take a look at Table 3. Table 3 basically plots the total taxes paid by individuals paying an income tax of greater than zero but lower than and equal to Rs 1,50,000. This is the lowest bracket for which the income tax department provides data.

Table 3:

Assessment yearTotal income tax paid by individuals paying an income tax of > 0 and <=1,50,000 (in Rs crore)Total individual income tax (in Rs crore)Proportion of total income tax

Source: Author calculations on data from, the individuals paying an income tax of less than or equal to Rs 1,50,000, pay a very low average income tax every year (around Rs 25,000 in assessment year 2015-2016), on the whole it adds up to a substantial amount. This is what Professor CK Prahalad called the fortune at the bottom of the pyramid. For assessment year 2015-2016, it amounted to a total of Rs 44,615 crore, which would have again enough to finance the budgets of several government departments.

Also, at lower levels, the idea is to get people to start paying income tax. Once they start doing that, they are more likely to continue doing it, in the years to come. Further, given that a major portion of these taxes are directly cut from salaries by companies and handed over to the government, the government has to do very little in order to collect this money. Hence, there is no reason for the government to scrap individual income tax, though theoretically it might make immense sense.

Also, the things that the government will have to do if it scraps individual income tax would require much more work than it is currently used to. And we all like to take the easy way out.

The column originally appeared on Equitymaster on January 16, 2018.

India’s New Subprime Home Loan Problem

In the early 1990s, a new kind of lending euphemistically termed as “specialized finance”, started to develop in the United States. This specialised lending involved, small, little-known firms basically lending money to cash-strapped Americans.

A large part of this lending was home loans and home-equity loans. Gradually, bigger banks and financial institutions became involved in this lending. This lending to cash-strapped Americans came to be known as subprime lending. The word “prime” is typically used in banking terminology with reference to the best customers of the bank.

As a part of subprime home lending, many Americans who did not earn enough to repay loans, were given home loans. Some of these loans started of with low interest rates and some with very low EMIs. As high EMIs kicked in, in the years to come, many individuals who had taken on subprime loans were not in a position to repay it. This problem peaked in 2007 and 2008, and very soon, the defaults started and as these defaults spiralled, they very briefly threatened to bring down the entire American and European financial system, in late August and early September 2008.

Subprime lending was one of the major reasons behind the financial crisis which broke out when Lehman Brothers, the fourth largest bank on Wall Street, went bust in mid-September 2008.

Dear Reader, you must be wondering why am I talking about this crisis more than a decade later. It looks like India might be moving towards its own subprime home loan problem, though the quantum of the problem may be nowhere as big as the one the United States faced, nearly a decade back. Nevertheless, there is a problem and it needs to be pointed out and acknowledged.

A little over a week back, the Reserve Bank of India, released a document rather nondescriptly titled Affordable Housing in India. The report has an extremely detailed section dealing with home loans in general and home loans of up to Rs 10 lakh in particular. Let’s look at Figure 1, which basically plots out the growth in home loans of up to Rs 10 lakh, given by public sector banks as well as housing finance companies (for reasons not explained, similar lending carried out by private sector banks has not been taken into consideration).

Figure 1: 

On the whole, loans of up to Rs 10 lakh grew by 23.5 per cent in 2016-2017, which is significantly higher than the 12.6 per cent growth in 2015-2016. In fact, when we take the number of home loans of up to Rs 10 lakh, then the rate of growth is even faster, as Figure 2 points out.

Figure 2: Home loans disbursements in terms of number of accounts. 

As can be seen from Figure 2, the total number of home loans have grown the fastest in the up to Rs 10 lakh segment. Now take a look at Figure 3.

Figure 3: 

As can be seen from Figure 3, the proportion of non-performing assets (where the borrower has stopped repaying the home loan) is inversely proportional to the value of the home loan. Hence, the lower the value of the loan, higher the rate of default on it. That seems to be the trend.

For home loans of up to Rs 2 lakh, the rate of default is as high as 10.4 per cent. But for loans of higher than Rs 25 lakh, the rate of default falls to as low as 0.9 per cent. The data here raises a few points:

1) Why are so many home loan defaults being seen for lower home loan values? Take a look at Figure 1. In 2015-2016, the home loan growth of public sector banks for loans of up to Rs 10 lakh was just 0.1 per cent. In 2016-2017, it was at 30.6 per cent. This is a clear indication that in 2016-2017, there was pressure on public sector banks to disburse more home loans of up to Rs 10 lakh. Under this pressure, it seems, home loans have been given to many people who are not in a position to repay them. This is one conclusion that can be drawn from this data, given the greater than 10 per cent rate of default in home loans of Rs 2 lakh.

2) The government launched the Pradhan Mantri Awas Yojana in 2015-2016. Under this scheme the government offers an interest subsidy of 6.5 per cent to those of income of up to Rs 3 lakh. Of course, this subsidy has pushed banks and housing finance companies to give out home loans of low values. At the same time, it has led to a deterioration in the quality of lending.

3) One question that needs to be asked for sure, has the waive-off in farms loans, across different states, also had an impact on an increase in home loan defaults. This is something only banks and housing finance companies can tell for sure. Nevertheless, it is a question worth asking because any loan waive off increases moral hazard.

4) How much of a problem are these defaults? The total home loans of up to Rs 10 lakh, given by public sector banks and housing finance companies, during the last three financial years stands at Rs 1,08,732 crore. With a default rate of a little over 2 per cent (for loans of up to Rs 10 lakh as a whole), this is clearly a problem banks and housing finance companies can easily handle as of now. But as loans under the Pradhan Mantri Awas Yojana grow in order to achieve the vision of Housing for All by 2022, this can clearly become a problem for public sector banks and housing finance companies.

5) Interest rates are now expected to rise in the days to come. This will mean higher EMIs and that can possibly increase defaults further. Also, it needs to be noted here that the RBI report on affordable housing does not give out the total amount of home loans given for amounts of up to Rs 2 lakh.

All in all, there are no reasons to worry on this front as of now. But this is a problem, which needs to be nipped in the bud, to avoid future problems.

The column originally appeared on Equitymaster on January `18, 2018.

Mutual Funds Clearly Point to a Stock Market Bubble


One sign of the stock market being overheated is when retail investors start entering it, dime a dozen. One way of checking this phenomenon out is looking at the kind of money coming into equity mutual funds, month on month.

So, let’s look at the total amount of money coming into mutual funds every month since January 2013 (I am not using an arbitrary cut off point here. The database that I use has monthly data from January 2013 onwards). The total amount of money coming into equity mutual funds is basically referred to as net investment, which is the total sales of equity mutual funds minus the total redemptions from these funds.

Take a look at Figure 1. Figure 1 basically plots the net investment into equity mutual funds month on month, over the last five years.

Figure 1: 

What does Figure 1 tell us? It tells us that a lot of money has been invested into equity mutual funds in the current financial year (i.e. between April 2017 and December 2017). In fact, 40 per cent of the money that has been invested in the equity mutual funds from January 2013, has been invested in the current year.

This, when the price to earnings ratios of stocks have been considerably high. At the beginning of April 2017, the price to earnings ratio of the Nifty 50 stocks was at 23.4. By end December 2017, it was close to 27. This means that at the beginning of the financial year, an investor was ready to pay Rs 23.4 for every rupee of profit that the Nifty 50 companies made. By the end of the year, this had jumped to Rs 27.

The average price to earnings ratio of the Nifty 50 stocks since January 1999 is 19.1 (again this is the data that is available in the database that I have access to).

This basically means that while stock prices kept rising, the earnings of companies, of which stock prices are ultimately a reflection of, did not rise at the same speed. The same logic stands for indices other than the Nifty 50 as well.

Let’s take the case of Nifty 500. The price to earnings ratio of Nifty 500 which was at around 26.8 at the beginning of the financial year, rose to 32.6 by the end. This basically means that as the stock market has become more expensive, it has attracted more and more retail investors, who have invested their hard-earned money, through the equity mutual fund route.

The law of demand basically states that there is more demand for something when prices are low and vice versa. This clearly does not work in case of the stock market. A bulk of retail investors get attracted to it, only after the market has become fairly expensive, which has clearly been the case since April 2017.

Let’s look at a little more mutual fund data. Figure 2 basically plots the yearly net investment in equity mutual funds since financial year 2003-2004 (again this might seem like an arbitrary cut off, but the database I have access to, has yearly data from 2003-2004).

Figure 2: 

As per Figure 2, the maximum amount of money that ever come into equity mutual funds has been in 2017-2018, and we aren’t done with the year as yet.

In fact, what is also clear from the table is that, as the stock market goes higher, more money comes into equity mutual funds. This trend is clearly visible between the years 2005 and 2008, also. Close to Rs 40,800 crore came into the stock market in 2007-2008, when the stock market was fairly expensive for most of the year. On January 8, 2008, the price to earnings ratio of the Nifty 50 touched a high of 28.3. The next couple of years, when price to earnings ratio of the Nifty stocks was in fairly inexpensive territory, barely any money came into equity mutual funds.

This tells us very clearly that retail investors buy when the markets are fairly expensive, instead of doing the other way around. The same story that played out between 2005 and 2008, is playing out all over again. Hopefully, a new set of investors will learn the same set of lessons, all over again. Meanwhile, the fund managers of mutual funds continue to remain bullish on the stock market. But they more or less always are. It’s worth remembering here that a mutual fund makes money as a proportion of the total amount of money it manages. And a bull market remains the best time to raise money.

Of course, all this comes as always comes with the caveat of John Maynard Keynes, “the market can remain irrational, longer than you can remain solvent”.

Postscript: I am happy to share with the readers of the Diary that the Business Standard newspaper has carried a review of my book India’s Big Government-The Intrusive State and How It is Hurting Us.

“India’s Big Government: The Intrusive State & How It’s Hurting Us is an unconventional, interdisciplinary book that cuts across sectors of banking, infrastructure, education, manufacturing and industry, land, taxation, and employment in post-Independence India, underscoring the necessity for the state to more effectively address critical matters, rather than attempting to do “too much,”” the review points out.

You can read the full review here. (To read the review open it in the internet explorer browser).

You can buy the book here.

The column originally appeared on Equitymaster on January 12, 2018.