Economic Survey 2018: Amount raised from primary markets could double from levels seen in last 6 years

Economic Survey 2018_Agriculture_

When stock prices boom, as they have done in the past two years, firms issue more equity publicly, taking advantage of the reduced cost of capital to embark on new investment projects, said the Economic Survey.

This happened in the mid-2000s and again around 2010. In the last two years, especially in the first eight months of this year, there has once again been a pick-up in equity-raising activity.

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The survey further highlighted that if current trends continue, the number of issues and their value could double the levels recorded in the previous six years.

How do these magnitudes compare with the previous periods of stock market euphoria? The above figure illustrates total capital raised—through public and private placements—over the last decade as a percent of GDP to make the temporal comparison accurate.

The red line depicts the price-earnings ratio. The green bars show that capital raising this year has picked up substantially but remains below levels reached in 2007-08, highlighted the survey.

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The peak of the previous boom despite the fact that the cost of capital is at similarly low levels. A price-earnings ratio of 25 implies equity costs of roughly 4 percent, said the Economic Survey document.