The butterfly theory of chaos proved relevant once more. According to this theory, a small butterfly flitting its wings vigorously in a remote corner of China could end kicking up a storm in the west coast of the US. And lo and behold, what damage the tightening by the BSE authorities on carryforward limits and scripwise limit for brokers wrought on the bourses, pushing operators brutally to square their position even in a bull market.

For the market participants this is serious, for this is the first time in my memory a bull market in the run-up to an election or budget has been interfered with. In any case, the U-turn in stock prices brought to centrestage the reality once more that therelationship between stock prices and the factors that drive it are at best a nebulous one. It can get punctured easily.

The closer the investors realise the reality, the better they can manage their investments and trades. The more you understand and accord due weightage to this tentative relationship, the more realistic stance you can adopt to your risk postures, as well as try to do better than the market.

Take a look at the positive factors. The current growth in the economy is due to sustained performance of the agriculture sector. But let us not forget that the rural buying power has started impacting the corporate sector after a pretty long lag. If the corporate scenario looks attractive today, it needed not only sustained agricultural growth, but low inflation, and a feeling of confidence among consumers. This synchronisation does not come easily and not often.

But lest one gets carried away by this, you should temper your market enthusiasm with a few other factors that are not all thatalluring. The fundamental flaws in the economy continue. Subsidies still continue to be at an unhealthy level of 14 per cent of the GDP. Not much thought has been given in Government circles. The Government is just riding on the benefit of the agricultural and software boom. The global factors have also come in handy. A rise in commodity prices has helped better realisation for corporates. But it will be the same factor that will jack up the nation's petroleum import bill which, in turn, will add to the fiscal deficit and exert pressure on the rupee exchange rate. Right now, the Reserve Bank has a few levers with which it has managed to hold the rupee. Investors should also not get carried away by the nation's balance sheet. The Government of late has discovered the new art of window-dressing the report card on the country's economic health. In the last 18 months, it revamped its GDP figures. And one more attempt is in the offing. The GDP figure is likely to be revamped again, this time factoring in moreaccurately the value of the services sector output as well as that of the small-scale industry.

Any window-dressing--or call it refocusing to a more accurate picture if you like--would certainly help improve the country's image abroad. But to what use? Concessional development aid has been cut to India long back, citing that India is not so underdeveloped any more. But despite the not-so-bright report card, the foreign direct investment flow into the country has not lessened. Its inflow is more related to enabling legislations. Many of these legislations have been carried out and some more are awaiting the formation of a new parliament.

But what is glaring is that the Government is going ahead with only those pieces of legislation which it finds politically convenient, and not what are an economic necessity.

Take a look at the power sector. The Centre has no intention of forcing the states into economic discipline. The state governments, by and large, have no intention of fiddling around with powersubsidies and threats. That is holy cow, on which political power rests. The politicians would rather carry on with power subsidies and thefts until they are forced with dire consequences. But the dire consequences will accrue only to the users of power. It will take many years for this class of users, who end up subsidising the power threats and subsidies, to revolt, like what happened in Latin America recently.

The mindset of the rulers is unlikely to change in the foreseable future. And that is not good news for investors. I touched upon power because without a sustained and strategic approach to power, continued economic growth is impossible. In the same vein, the nation is still lost for a relevant policy on agriculture that will give rise to a second wave of reforms in this sector. Supply of good seeds, and reliable and relevant pesticides with an adequate back-up service are only just two examples where the management of the agriculture sector has had no push from the Government either in terms ofpolicy or meaningful aid.

So, ultimately, we may end up with a scenario where the corporate sector is waging a lone battle. The Government, instead of aiding the industry, could actually end up weakening the foundations by its unwillingness to tackle issues of structural weakness, and resort to ad hoc measures like increased taxation. It is also not making it easy for the country to have lower interest rates.

The fact that corporates are not having a rosy time is amply brought to light by the recent study of Crisil on the rating scenario. The ratings in the speculative category have gone up from 5 per cent to 32 per cent over the last few years in a study covering 251 manufacturing companies. This is not sweet music for anyone--not for the banking industry, the Government or the investor. So, if you do feel exuberant about rising stock prices, it is time you realised that there is a limit to this glow over the growth in the GDP or agriculture figure. Growth there automatically need not mean better ratingfor stock prices. Traders must realise that the current boom in the stock market is driven, among others, by liquidity, both from the foreign institutional investors and retail investors.