Friday, October 24, 2008

Government crisis

Arjun K. Sengupta writes in Hindu, “ardent market fundamentalists now recognise that markets often fail” so the “governments have to correct the markets equitably and efficiently..which policymakers often do not, because of their reluctance to give up orthodox market solutions” which is the real nonsense to argue.

Ok come to next he is saying that “When private investors are reluctant, we have to depend upon public investment to stimulate investment. We have a large public sector functioning with efficiency, as has been demonstrated by a sustained increase in its profitability. The government may mobilise some of our public sector corporations engaged in the sectors of power, transport, construction and communication to expand investment in our infrastructure. Many of these enterprises have long experience of successful execution of such projects”. He is making murky of every one.

Further he is proposing as loose policy. “….calls for active government intervention in the stock markets to raise their values, through some kind of sovereign funds for purchasing stocks. Without buying designated assets, as some others are trying, we may use our mutual funds. They can do the job quite effectively with the minimum involvement of the government. A simple mechanism would be opening a window of lending to the mutual funds against their purchase of stocks or retaining them even when there is a high demand for redemption. To make this window attractive, this lending can be at variable interest rates, such as at a zero rate for the first six months, raising it steadily for every succeeding six months. If the mutual funds can invest in stocks whose prices go up quickly, they can retain the profits or pass them on to the investors, paying only a relatively small rate of interest. This is a simple mechanism which can have an immediate impact on our stock market.

The response of public intervention in a situation of market failure must be designed in such a way that attacks the problem at its roots. The government should use all its instruments with a clear objective. In the current situation the primary objective is to increase the confidence of all market participants in our potential for growth”.  

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