Stock markets tank as FIIs reassess
India By Indrajit Basu
KOLKATA - Barely a day after it shrugged off
fears of instability due to a Congress-led government
with Marxist support, Indian stock markets lost their
nerve, with the Bombay Stock Exchange Sensex tanking 330
points on Friday and another 564 points Monday (to close
at 4,505 points), the biggest-ever fall in a day, after
slipping a gut-wrenching 787 points at the beginning of
trading that forced the Securities and Exchange Board of
India to close trading for over two hours.
Congress
stalwarts, including economics wizard Manmohan Singh,
who could well be the next finance minister, communist
parties, and the Reserve Bank of India, by instructing
domestic financial institutions to buy aggressively in
the markets, helped the index recover from the bad start
to the day. They hurriedly stepped in to calm fears by
declaring that crucial reforms will continue. However,
Foreign Institutional Investors (FIIs) declared that it
was time to reassess India's economic environment.
"The choice of ministerial positions
will be a dominant influence on economic policy
formation. But, in our view, a Congress-communist
alliance does not portend well," said UBS Investment
Research, an affiliate of the premier foreign investment
bank. The Congress party of Sonia Gandhi will have to
rely on the support of several leftwing parties to form
a government.
And Citigroup Smith Barney in a
report said, "Stability - maybe yes. But policies??" The
report puts two question marks on it. "While Congress
has a good track record on reforms, from the market's
perspective, the dependence on the Left parties is a
worst-case scenario coming true. We are changing our
view on Indian markets and turning cautious," Citigroup
Smith Barney told its clients. It added that the scope
for populist policies has increased and some of the
pending but contentious reforms are unlikely to be
implemented. However it also added later, "We believe
that many of the reforms initiated by the BJP-led
[Bharatiya Janata Party] government, including
privatization, are likely to proceed, albeit at a slower
pace."
Indeed, the Left party leaders' rigid and
"ill considered statements" - to many indicating
complete opposition to the disinvestment of state-owned
companies - contributed to most of the mayhem on Friday
and Monday and the FIIs re-thinking on India. At least
two "red" party ideologues spoke about winding up the
Disinvestment Ministry itself. The Samajwadi Party -
another possible Congress ally - also made noises about
opposing disinvestment; at least in the manner in which
it was done by the BJP-led government.
But the
moot questions are, how real is the Left threat, and how
freely will the Left allow the country's next government
and economic policies to run? "We will back all reforms
initiatives for the development as long as the Sensex
[the benchmark stock index] is not adjudged the sole and
most important indicator of economic health or the
market as the sole arbiter of all economic polices,"
said Somnath Dasgupta, a key Communist Party-Marxist
member.
"Reforms just do not have one
face ... Business and industry should have
full confidence in the new government and trust its
ability to bring in reforms that will work for every
section of the population and not shine for just a few,"
he added.
But why has the disinvestment process
become a barometer for the future of reforms,
particularly for FIIs? For one, FIIs were big buyers of
state-owned company shares, especially companies such as
ONGC, Dredging Corporation, Gail India, Power Trading
Corporation, IPCL and Petronet that were divested in
March. Since every poll pundit and psephologist
predicted a return of the BJP-headed National Democratic
Alliance (NDA), FIIs and other investors remained
bullish about state-owned company shares and remained
fully invested in the run-up to the elections. Moreover,
ex-disinvestment minister Arun Shourie's promise to
raise US$22 billion from the primary capital market
further encouraged such bullishness.
The fact
that the NDA government sold at least six state-owned
companies at the peak of the bull run means those
investors that have bought high stand to lose a lot if
further disinvestment is scuttled. That, too, has
intensified the selling pressure.
Nevertheless,
according to Moody's Investor Services, foreign funds,
and Indian investors too, may be overreacting and
turning pessimistic perhaps a bit too early. "Despite
concerns about the pace of reforms and disinvestment
program under the Congress-led government, the
fundamentals and external equity of the country are
still very strong," said Kristin Lindow, vice president
at Moody's. She also feels that divestment should not be
the only concern. "There are many other variables, like
the large fiscal deficit, state of public finances and
internal borrowing tariffs, future tax rates, which many
have not taken note of, and the budget that is expected
in June will actually help assess the future India's
economy and reforms," she said.
Moreover,
Raghuram Rajan, chief economist of the International
Monetary Fund, is glad that the Congress plans to spend
more on the rural sector. "There are areas we need more
investments, for example, in the rural sector. The fact
that the new government wants to do more of that is a
good sign. Provided it is not done at the expense of all
that's already been done," said Rajan.
Rajan
also feels that "given the political formations that are
evolving in post-poll India, there is no reason to
believe that India's fiscal positions and the India
story will change significantly. And the lessons from
this election will be the right ones. After all, even if
India needs faster growth, it has to be widespread and
it needs to be focused on a variety of things [like
welfare spending, and a boost to the farm sector] that
India has not been focusing on."
Meanwhile,
according to analysts, even if the bloodbath that the
Indian market saw Monday is unprecedented, it may not be
over just yet. "The political outcome has been
unprecedented, and the markets do not like uncertainty.
This uncertainty is followed by other issues like the
political agenda, if it's going to lean more towards the
Left, and also on the stability of the new government,"
said Arup Raha of JP Morgan, "which means that there's
still downward pressure ahead."
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