Thursday, March 20, 2008

It's only the markets, stupid

Markets are crashing everywhere, including in India. Watching stock price declines on TV screens, it's easy to think this is the end of the world.

Hold on. Markets are only an imperfect barometer of the economy. They may get the direction right but not the magnitude. So, a falling market could indicate a slowdown but a crash need not mean a recession. Similarly, a sharp rise in the market does not mean growth has accelerated. Asset prices are prone to "overshooting" in either direction.

I emphasis this because the recent crash in the Indian stock market is being interpreted by some as sign of a serious slowdown- to say 7% or even 6%. People point to the decline in industrial growth rate in January and see this is as confirmation.

I am not sure that the prospects for either the Indian economy or the world economy are as grim as some are painting it. My detailed comments in my Et column, Is it just a blip or a slowdown?

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