People's Democracy(Weekly Organ of the Communist Party of India (Marxist)
May 23, 2004
since the exit poll results suggested that the NDA government may not come back
to power, the stock markets began to slide.
when it became clear that a Congress-led government, backed by the Left, would
actually rule at the Centre, the subsequent market collapse was blamed by the
financial press on fears regarding disinvestment and other possible economic
policies of the new government.
much of the presentation of economic news, especially in the financial press, is
oriented around the behaviour of stock markets, that it is not surprising for
people to think that their movements actually reflect real economic performance.
STOCK MARKET AND THE SENSEX
the world, ordinary citizens have been conned by the media into believing that
the relatively small set of players in international stock markets really do
comprehend and correctly assess the patterns of growth in an economy, and that
their interests are broadly in conformity with the economic interests of the
masses of people in those countries.
is a deeply undemocratic position. As such, a collapse of the Sensex in itself
should bother very few people.
stock market even in the US is neither a significant source of finance for new
investment nor a means of disciplining the managers of firms. It predominantly
is a site for trading risks and is mainly a secondary market for trading
pre-existing stocks or new financial instruments, such as derivatives, that are
based on them.
if anybody loses from short-term swings in the market, it is only those who have
speculatively invested their wealth in trading stocks in the hope of quick
features are even truer of the Indian stock market in which few shares are
actively traded, few investors such as the financial institutions, big
corporates and foreign institutional investors dominate, and a small proportion
of the stocks of most companies are available for trading.
is more, nobody has inflicted on investors the notional loss that has occurred
in India’s markets prior to and after the elections. Some market participants
have brought it upon themselves and other investors.
may be true that dissent over disinvestment was the specific trigger for the
decline on May 14. But if the new government is to respect its mandate there are
a host of policies that it will have to adopt which could result in a similar
collapse of expectations and the Sensex.
the government may have to moderate increases or even reduce the administered
prices of a host of direct and indirect inputs such as power, oil and fertiliser,
in order to alleviate the difficulties being faced by the farming community.
implicit subsidy this involves may have to be financed in the first instance by
an increased resort to deficit financing and in the medium term through an
increase in direct taxes on the higher income groups and indirect taxes on
fiscal adjustments may be necessary also to launch large-scale employment
generation programmes to make up for the slow pace of employment expansion and
the consequent persistence of poverty during the 1990s.
policies may be needed to widen the coverage and increase the availability of
subsidised food through the public distribution system. Increased food
availability at subsidised prices is crucial to reversing the decline in per
capita food consumption and in calorific intake reported by the NSS surveys in a
country where a large proportion of the population is at the margin of
of this would be seen as “populist” and “anti-reform”, since NDA-style,
IMF-inspired reform requires a cut in the fiscal deficit, a lowering of direct
taxes, an increase in administered prices and a reduction in subsidies. Attempt
to redress the intensely inegalitarian path of development under the NDA can
therefore be identified as damaging by the “market” and those who advocate
fact, sections of the media that had celebrated neo-liberal economic reform
under the NDA have already effectively declared that all of the policies noted
above can be a cause for market distress.
markets are nervous, they argue, because of uncertainty about the attitude of
the new government regarding the “economic reform” process.
fact, the election result that (contrary to all expectations) delivered a
massive defeat to the NDA clearly indicates that certain aspects of the reform
must be reversed.
DEFEAT OF THE BJP AND ITS ALLIES
defeat the BJP and its allies suffered in all but three states has been widely
seen as the result of two factors: mass rejection of the communal policies of
the BJP and mass anger with the devastating impact of the neo-liberal economic
policies of the NDA government on rural India and the poor and lower middle
classes in urban India.
Even in Karnataka, the Congress government of that state suffered because of
adherence to similar policies.
anger was all the greater because of the cynical way in which the NDA was
seeking to win another term by misusing manipulated indices of economic
performance and celebrating the gains that a small upper crust had derived from
the liberalisation process.
the nature of this mandate, unless the new government currently being formed
refuses to take account of its full meaning and reneges on its own election
promises when formulating its policies, a substantial dilution and even major
reversal of certain components of the NDA government’s economic reform are
if few investors who drive the “markets” are nervous about the nature of
economic policy, the error lies in their expectation that economic policies
which benefit them but adversely affect the majority can be sustained in a
democracy where the poor have a voice, even if only at intervals of five years.
expectations were patently wrong and so were the bets based on them. This is not
to say that adopting policies that are less elitist would not guarantee
investors normal profits. They only threaten the abnormal speculative profits
that policies tailored to please finance and big business, such as privatisation,
were expected to ensure.
in this light, the message that is being delivered by the “markets”, and
sensationalised by the media, should be dismissed as undemocratic and
is also a completely false argument, since it has been abundantly clear for some
time now that stock markets are very poor pointers to real economic performance.
STOCK MARKET INDICES
market indices are indicators of the expectations of finance capital, and they
can move up and down for a variety of reasons, most of which are not related
even to the current profitability of productive enterprises. They are prone to
irrational bubbles and sudden collapses which reflect all sorts of factors,
ranging from international forces to domestic political changes, and may have
very little relation to economic processes within the economy.
the latest fall in the Indian stock market. While it is true that some of it is
clearly a reaction to the uncertainty created by the unexpected and remarkable
defeat of the NDA government at the polls, it also should be noted that across
the world, financial markets have been in downswing in recent weeks.
1 tracks the movement of the New York Stock Exchange composite index, the Bombay
Sensex and the Nifty. The NYSE composite index fell by 4 per cent between May 5
and May 14, and other markets across Europe and Asia have shown similar or even
of this is because of rising oil prices, the failure of the economically and
politically expensive US military occupation in Iraq, and fears of interest rate
hikes in the US.
is true that the Sensex index fell by more than 10 per cent and the Nifty index
by 12 per cent over the same period, but this is still part of a more general
worldwide trend of decrease in stock values, and some market analysts have even
described these as necessary “corrections” of the earlier inflated values.
the past year, Indian stock prices had been pushed up by large inflows from
foreign portfolio investors, who had recently “discovered” India as an
attractive emerging market that has not yet had a financial crisis.
meant that, despite the fact that very little had changed in the so-called
“fundamentals” of the economy, there were substantial inflows from financial
investors that also caused the rupee to appreciate.
investors use emerging markets like India to hedge against changes in other
markets; they also like to focus on particular countries in any one period,
where herd behaviour creates a boom and the countries concerned become the
temporary darlings of international capital.
India in the recent past, the numerous concessions provided by the NDA
government to such mobile capital also allowed for large super-profits to be
made through such transactions.
the Indian stock market still has relatively thin trading, these foreign
institutional investors made a big difference at the margin, and were
responsible for pushing up stock values well beyond what would be “sensible”
values according to standard international norms of price-equity ratios. This is
typical of the bubbles that have been created by internationally mobile finance
in various developing countries especially since the early 1990s.
is inevitable that such bubbles must eventually come to an end, whether through
a sharp burst in the shape of a financial crisis or through a slower and more
managed shrinking of values.
this happens, it is true that a lot of players who have put their bets on
continuously rising share values will be affected, but this need not mean that
there has been any other bad news in the economy.
course, it is always difficult to attribute causes to stock market movements,
since financial markets are notoriously prone to “noise” and irrational
more than the actual causes, the implications of such falls are what matter to
most of us, and this is where the mainstream media have been the most
STOCK MARKET BEHAVIOUR
is usually argued that stock market behaviour is a reflection of “investor
confidence” and this in turn affects important real variables such as
productive investment in the economy, which is critical for growth and
development. This is not really the case, and has become even less true in the
since the early 1990s, the stock market has experienced huge increases and wild
swings, while investment has not shown any such volatility and indeed has barely
increased in real terms.
is evident from Chart 2, which shows the index of stock market capitalisation in
India since the early 1980s. Stock market capitalisation increased by around
four times in the decade 1991-92 to 2001-02, with very large fluctuations in
contrast, total gross fixed capital formation in the economy increased much less
even in current prices, and in constant prices it barely doubled. More to the
point, Chart 3 show that the large swings in market capitalisation were not
associated with any commensurate changes in investment, suggesting that the
financial markets dance to a bizarre tune that is all their own, and do not have
much impact on real investment in the economy. This is very important to
underline, because the reason that we are all supposed to be concerned about
stock market behaviour is because of its supposed effect on investment. In fact,
it is really only those agents who are dependent upon the return from finance
capital who are affected, while real investment depends upon many other factors.
other impact that movements in the stock market have nowadays is on the exchange
rate, especially since so much of the change is caused by the behaviour of
foreign institutional investors.
movements over the past year have helped to build up the RBI’s foreign
exchange reserves to an almost embarrassing amount, partly because their inflows
are not being used to increase productive investment, and partly because the RBI
kept buying dollars in an effort to keep the rupee from appreciating even
the large forex reserves may have provided a macho feeling of false confidence
to some, in reality they were a reflection of huge macroeconomic waste, since
they implied that the capital inflows were not being productively used.
were also expensive for the economy to hold, since the interest received on such
reserves by the RBI is typically very low, whereas the external commercial
borrowing by Indian firms in the current liberalised environment was at
significantly higher interest rates.
this background, some dilution of the forex reserves may even be welcome. Of
course, if the current outflow turns into a capital flight, which is also joined
by Indian residents, then clearly the situation can become more serious. Such a
possibility is now more open because of all the recent measures liberalising
capital outflow that the NDA government brought in the closing months of its
new government may have to address some of these measures quite quickly, to
prevent excessive capital outflows, which can then become another means of
pressurising the government on its economic policies.
in all other respects, there is not reason for the new government to concern
itself with keeping the financial markets happy or letting its behaviour
influence economic policy.
people’s mandate is for a redirection towards more progressive policies, which
will also deliver more sustainable growth. Financial markets, if they are at all
sensible, will not only have to respect that mandate but also realise that that
is also the only route to political and economic stability.