India witnessing a Lehman-like crisis, says Elara Capital's Raj Bhatt

Raj Bhatt, vice-chairman and chief excutive officer (CEO) of Elara Capital, says that India is in a similar situation as the US after the 2008 Lehman Brothers crisis. In an interview with Sundar Sethuraman, Bhat says that the government should take steps to address the risk aversion among banks and financial institutions. Edited excerpts:

Why are the markets weak despite a stable government at the Centre?

Globally, the US-China trade war is a sentiment dampener.  Europe is going through a challenging time, and the interest rate in the US is indicating that it is going into recession. Domestically, we have a liquidity crisis: Banks are not lending and companies are struggling to find growth capital. Banks are not lending because they have burnt their fingers in the past. They are playing safe due to fears that their lending decisions may be questioned at a future date.

What should be done to tide over this liquidity crisis?

I think we are in the same situation the US was in during 2007-08, after the Lehman crisis. Banks were not lending to each other and so the credit market was jammed. We need to do something drastic like the US’s Troubled Asset Relief Program (TARP) scheme. The US government created a TARP of $400-$500 billion as the banks were not lending, and there was no trust from investors. The government needs to create a special situation fund to take all the toxic assets out of the system. Right now, printing money is not a bad option. We need at least ~5 trillion, anything less than that is dribs and drabs.

FPIs are on a selling spree after the Budget. Do you think the whole surcharge issue could have been handled differently?

The surcharge issue has affected sentiment. The government should exempt funds from it. How can you create a corporate structure when the funds usually are unit trusts. Why should you force this surcharge when the aim was to tax the super-rich. And, even the super-rich, who are corporates in India, does not have to pay the surcharge.  However, the real reason for the FPI sell-off is lack of confidence in the market. All the headline numbers are not positive, whether it is auto sales, jobs, or earnings. It will take time to stabilise. Even marquee stocks are hit in this downturn. Right now, moderation in valuation will take place. The valuations were at elevated levels. Now, there is some correction in the valuations. Over the last 10 years, a lot of money came through the exchange traded fund (ETF) route. ETFs look at the index returns and invest. ETF money will move out when the prices start falling. If the markets fall, they exacerbate the fall. We have to create some optimism in the market so that investors believe that your long-term story is intact.

How do you navigate in this market? What is your advice to investors?

Investors will make gains if they invest for the long term. India is not a market for someone who cannot see losses. The demography of India will make sure companies will do well.

How concerned are institutional investors about volatility in the market? What is the feedback you are getting from your clients?

They are hoping that this government will do something to improve sentiment. Corporate governance issues are a significant concern. Institutional investors are cautious and that’s why they do not invest in small companies. They invest in index stocks. This change happened over the last few years as one scandal after the other shocked investors. Liquidity stress is also bothering them. Lack of continuity in policy is another dampener. Now, the time has come where a corporate contract with a state government should be honoured regardless of which party comes to power.