The recent gyrations of the stock market, which have pulled prices down by nearly 25 per cent from their all-time highs in January, can no longer be seen in isolation from the real economy. The role of capital markets, after all, is to both channelise funds into new investment and serve as a barometer of the future, guiding businesses about the potential pay-offs from their investments. The first function clearly seems to have been impeded, primarily in the form of Initial Public Offerings (IPOs) being withdrawn, thereby reducing the funds available for companies to expand their businesses. It is too early to tell whether the steep decline in stock prices will induce a large number of companies into postponing, or even shelving, investment projects. It might well have. However, there are also factors outside the market that are playing a role, and some of these may counteract the impact of adverse market movements.
 
The most important of these is the gradual improvement in the investment climate when it comes to the infrastructure sectors. The power sector has at last arrived at a regime in which large-scale investments in generation make commercial sense, enough to attract two of the largest players in the private sector, the Tata group and the Reliance ADAG group. While some of the more important requirements of the Electricity Act of 2003 are yet to be met, the ultra mega power plants have been provided adequate safeguards by being allowed to contract with multiple states to supply power. More large plants, efficiently located and sized, will surely follow. Two new airports
are on the verge of inauguration, while the Mumbai and Delhi facilities are the scenes of massive expansions in capacity in every aspect of their operations. Urban mass transport systems, new or complementary to existing ones, are coming up in a number of cities. The highway programme has had its hiccups, but gets more ambitious with each new phase. Compared to just a few years ago, the quantum of funds pouring into infrastructure across the country has grown explosively.
 
The second driver of investment activity is the significant up-trend in commodity prices. Natural resource-based industries have not had it so good for quite a while and, with prospects of sustained increases in demand from the fast-growing economies in the region, including India, massive investments at various levels of scale are being executed. The larger of these are undoubtedly having trouble on account of environmental and social issues, but smaller projects are less constrained by these factors and are making progress.
 
Counter-acting these drivers is the cyclical downturn, partly manifested in the movements of the market but also visible in the growth performance of several industrial sectors. The downturn itself may be the result of producers in many sectors deciding that enough capacity has been created for the moment and that it is time to take a break. So, investment activity will moderate for a while, aided and abetted by market volatility. However, the generally optimistic medium-term outlook should keep that hiatus relatively short; no business would want to be caught napping when the cycle does turn. Overall, the outlook for investment activity seems quite positive, with structural change offsetting the turn in the cycle.