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The Babu and the Market

What is a Babu?.A Babu is an Indianised term for a government official. In recent times, it has taken a disparaging connotation -- for someone who is slow and inefficient. Here is how The Webster Dictionary defines it.There is a general consensus that excessive bureaucracy was to blame for India's slow growth since Independence in 1947 to the early nineties.

But how exactly, does any inefficient bureaucracy stymie growth?.The answer is surprisingly complex. What a lethargic bureaucracy does is increase the government deficit.

This in turn, causes interest rates to rise. In other words, borrowing costs for corporations also rise. [Lot of macroeconomics deleted to come to this conclusion].Thus a corporation that intends to borrow money for buying expensive equipment might put off this decision till later. Corporations that are already paying interest might pay higher amounts due to higher rates(not dissimilar to a variable rate student loan).Therefore their net income(income - costs) drops, as costs increase.

Thus the stock price (P/E * net income) also drops, as does the overall stock market.This is an oversimplifications, but it gives you an idea why the voting in of a socialistic/left-leaning government is accompanied by a drop in the stock market.Namaste.

Original link: http://bloggerman11.blogspot.com/2006/04/babu-and-market.html.

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By: Dev M



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