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Summary Forecasting what is likely to happen in calendar year 2009 is a tough proposition.
Looking back at where I pictured the world to be - and India within it - I can say this with certainty: where I had imagined we would be in December 2007 is not where we are in December 2008. And it is not a pretty picture: every sector within the stock market has taken a beating. What a difference from the scorching performance of the year 2007.
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From greed to bust Closer to home, I have long considered banks like ICICI Bank as dangers to the Indian economy. For many, ICICI Bank has been the "poster boy" of Indian banking. To me, the aggression of these "new age" banks was a threat to the Indian banking system. Banks are meant to make money on the loans they give, not brag about how large their loan book has grown. Largeness is what people discuss in bars, not what heads of banks should advertise - or what film stars should endorse. While Indian banks were saved from the horrors of insolvency and the global credit crises, ICICI Bank was the only bank whose name kept cropping up as a bank in trouble. Luckily for all of us, ICICI Bank survived this scare - as it has survived past scares. Maybe a more chastened management will learn from its past mistakes and behave more like a bank. Maybe. 
Secondly, while I did expect the US economy to be in a recession, I predicted the Indian economy would be largely sheltered from this. The jury is still out on this prediction. But, if the vote of the stock market counts, then the decision seems to be that India is very much coupled to the fate of the US economy. The battering of the Indian stock markets is in line with its global peers. That was not what I had expected.
And, finally, while I was frightened by the prospect of short term capital flows that had entered India via the P-Notes and was concerned what their "unwinding" could do to share prices; I was taken aback at the extent of the relentless unwinding. Foreign "investors" have been net sellers of Indian stocks for 154 out of 243 trading days in CY 2008. For the year, they were net sellers of USD 13.1 billion. Data from www.equitymaster.com indicates that FIIs have never been net sellers in any previous calendar year. Offsetting the wrong views with some right ones We had liked gold (gained + 5.8% in USD and + 30.6% in INR) and we were correct to be negative on the INR (declined -23.8% v/s the USD and -18.2% v/s the Euro). We felt oil prices were too high and defied the fundamentals. Oil continued to climb and peaked at USD 146.93 per barrel in July, 2008 but finally ended at USD 35.35 per barrel; down -75.9% for the year). And we thought real estate prices were too high - they still refuse to collapse but they are falling for sure.
The prices of commodities - steel, rice, wheat - had also risen excessively, we opined, they would decline. Happily, they have all headed south. A case of a wrong asset allocation At the start of the year 2008, my suggested asset allocation was:
The high allocation to equities was a terrible call.
 By October 8th - jarred by the collapse of Lehman Brothers on September 15th and the complete freeze in the credit markets - I suggested a new way to look at the world.
My advice was: Review your need for "safe cash" - the amount of money you need every month to maintain your minimum lifestyle.
I am an optimist - an ingrained characteristic of any equity investor - and believe in a better future.
So, depending on your ability to withstand turbulence and uncertainty, it would be a good idea to keep enough money with you to pay the bills to maintain your lifestyle for "some time". That time period can vary anywhere from 6 months to 24 months. You can achieve this by not putting any of your savings into any investments for a while. This means that - from your monthly savings - you do not invest in stock markets. Automatically, your "allocation" to cash will increase. You may also elect to sell some of your investments - even at a loss - to build your reserve to your preferred level of "safe cash" to maintain your present lifestyle. And then add back to your investment kitty every month as you get your salary and monthly earnings. Once you have kept your "safe cash" aside (the 6 months to 24 months of lifestyle spending), then invest the balance of your money in stock markets (80%) and gold (20%). That advice on "asset allocation" was given in October, 2008. At the outset of CY 2009, there is nothing to indicate that you need to change that.
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Outlook for CY 2009: I can’t see clearly now At the start of CY 2008, the Indian economy was plagued by high oil prices, high commodity prices, and high employee costs - along with a shortage of skilled labour. As we begin CY 2009, India has the advantage of lower oil and commodity prices - and a more stable labour pool that can be relied on to contribute to the growth of companies. Though I remain optimistic on the ability of the Indian economy to grow at 6.5% every year at an average, we have our own uncertainties. 
Despite a consistent record of strong GDP - probably second only to China’s growth - India is caught in its own tangles of bureaucracy, corruption, a lack of infrastructure, and mostly self-serving politicians. We need huge resources to improve the lives of the 400 million poor people in this country and few have worked out the cost - or the benefits - of building this India. The continued terrorist attacks on Indian soil - there were 34 terror attacks in India - continues to expose the corruption and the inefficiency of the political and bureaucratic system. While mad terrorists with a desire to die can never be stopped, the ease at which they can terrorize is what is terrifying. On the business side, Indian entrepreneurs have done well despite having a government, not because these entrepreneurs work in a supportive government framework. Most ministers who set policies are influenced by lobbies, not by a selfless national goal. And it is this lobbying that allows many socially destructive Indian business houses to thrive. They live off their political connections and political blessing. And there continue to be managements - everywhere in the world, including India - who will be happy to take advantage of bad laws or the silence of investors to further their private wealth, at the cost of the larger shareholder base. There were 2 notable such events last year: Ranbaxy and Satyam. The government, as a majority shareholder in many PSU entities, is also guilty of using many listed companies to further its political objectives - and putting the price tag on the silent, minority shareholders. Expect more theft. But the "India risk" remains - as it has for over 40 years - and you need to continue to navigate your investments in this environment. The long-term GDP growth numbers will eventually show up in company profits - and in stock market performance. Though in the near term the stock markets - like the alerted cobra struck on its head by the snake charmer - are likely to be mesmerized by the flows of foreign capital and movements of the global stock markets. Note that fact, but don’t let it determine your (or your fund manager’s) investment actions.
In conclusion Despite these uncertainties, we need to go through the exercise of "asset allocation" to understand how best to position our investment portfolios. And, if there are unexpected changes of significance as the year unfolds (as there were last year), then we need to factor those new unforeseen events and make the necessary changes in our investment portfolios. For the moment, keep your mind at ease by keeping aside enough cash - and split any balance you have in an 80:20 ratio for investments between equities (individual stocks, equity mutual funds, and tax-saving equity mutual funds) and gold.
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