Bubble as a word seems to really be in an overdrive. There isn't a single day when the financial media does not make a use of it. And why not? Money printing machines across the developed world are stretching their capacities to the hilt. And it is at times such as these that the threat of bubble formation across asset classes is at its highest.
India is mostly immune to these bubbles one would feel. After all, there is no news or whatsoever of India's central bank indulging in some kind of quantitative easing.
But is it only money printing that leads to bubble? Certainly not. We believe that wherever there is excess liquidity, there is a tendency for bubbles to form. And excess liquidity could well be in the form of too much capital inflows in a short span of time and that too, mostly unchecked.
Excess liquidity could also take the form of too much debt in the system as well as credit excesses. And last but not the least, if the underground economy of a country or what is more popularly known as 'black money' in the system is huge, then that can also lead to asset bubbles.
Thus, India may not be indulging in any quantitative easing. But we believe just like developed world, there are times when there is excess liquidity in the system. And when it comes to India, the excess liquidity in the system could be on account of the above mentioned factors.
It is indeed a very useful exercise to trace the flow of money if one wants to zero in on potential asset bubbles. And if we perform the same exercise with respect to money flows in India, we believe there exists a bubble in the consumption patterns of its citizens.
You see, the capital inflows into Indian equities, the black money with the Indians and the large deficits that the Government runs so that its citizens continue to enjoy its benefits, are pointers to the fact that Indian consumers are really having a whale of a time out there.
The fact that not all Indians are enjoying the fruits of this surplus liquidity that is flowing to them is a story for another day altogether. But those who are indeed a recipient of the excess money flows are splurging, and splurging big time.
Little wonder, sales of most consumer items in India have broken previous records and are growing at a rate never heard of before. Be it cars, two wheelers, consumer durables or high value FMCG goods. Everything is flying off the shelves.
Thus, while companies that cater to these items are having a great time counting their money, we believe such growth rate may not continue well into the future. Longer term, growth should revert to the numbers that we are more used to seeing. Hence, companies betting on annual growth rate of the magnitude of 25-30% should step back a bit and have some sort of reality check. This is based on excess liquidity and may not be sustainable after all. In other words, it could well be a bubble just like real estate.