Further, at the margin, it was clear that if the boom in the market had to be sustained, the newly emerging dotcom companies in India had to play a role. In the face of disillusionment with available new economy stocks, investors were not returning to older companies which dominated the market, but turning their attention to these dotcom companies. Every major fund manager had created a special fund for investment in what were seen as hitech stocks. The realisation that such stocks were not the best buys would, therefore, have affected market sentiment at the margin.

A more reasoned response would therefore have been that the April 4 slide per se was not much cause for concern. The real problem is why old economy stocks have for quite some time now been performing relatively poorly, resulting in significant changes in the relative shares in market capitalisation of old and new economy firms. One major reason for this sluggishness in the old economy is the fact that stock values there seem far more tethered to trends in the real economy. Recent evidence of a modest recovery in the index of industrial production notwithstanding, the overwhelming impression is one of sluggishness in the industrial sector. Non-oil imports are virtually stagnant, despite the post-liberalisation increase in the import-intensity of domestic production. Investment rates are low and so are imports of capital goods. The recovery of industrial production appears to be due to the lagged effects of a good agricultural year and the implementation of the Pay Commission's recommendations. Since, agricultural growth is likely to be lower in 1999-2000 and the stimulus provided by higher salaries and salary arrears would soon weaken, capacity utilisation is expected to return to lower levels. As long as this sluggishness persists, stock market trends would remain skewed and speculation prove crucial for stock market buoyancy.
 
Thus even a government concerned with financial market (as opposed to real) indicators would be keen on engineering an industrial revival. However, even here the government appears to be relying only on financial levers. Obsessed with the fiscal deficit while handing out fiscal concessions, such as that on capital gains referred to earlier, it has had to cut expenditures, especially capital expenditures. This at a time when unutilised capacity in industry, slow agricultural growth, persisting poverty, large foodstocks and comfortable foreign exchange reserves make a strong case for higher spending aimed at triggering an industrial revival.
 
Unfortunately, a higher fiscal deficit, just as much as a higher tax rate, is considered anathema from the point of view of the foreign portfolio investor. In the event, the government has chosen to rely on the twin monetary measures of pumping in greater liquidity and reducing interest rates to spur industry. Recently, Reserve Bank of India Deputy Governor Y.V. Reddy reportedly declared before Reuters Television cameras that: "Our preference and the preference of most of the market participants is to have an easier interest rate regime at this stage of development." In keeping with this perspective, the government launched on a series of concerted efforts, involving reductions in the Bank Rate of the RBI, and in the CRR and SLR of banks, aimed at bringing down interest rates.
 
As a result, after the debilitatingly high levels that interest rates touched during the stabilisation of the early and mid-1990s, they have been moving downwards. The prime lending rate, or the rate at which banks claim they lend to their best clients (which came into operation in October 1994), stood at an average of 15 per cent in 1994-95 and 16.5 per cent in 1995-96. Needless to say most ordinary borrowers would have been charged rates which were between 2 and 3 percentage points higher than this. Since then the PLR has indeed declined, to 14.5-15 per cent in 1996-97, 14 per cent in 1997-98, 12-13 per cent in 1998-99 and between 12-12.5 per cent in September 1999.
 
As should be clear, this lowering of rates has done little thus far to reverse the sluggishness in the industrial sector. Yet, the government has stuck to this strategy. One more initiative in this direction was the reduction in the cash reserve ratio (CRR) of banks by one percentage point in the monetary policy review for 1999-2000, which, by releasing liquidity to the tune of Rs.7000 crore was expected to help ease interest rates. At Budget time the Finance Minister announced a cut in interest paid on small savings schemes like the public provident fund and national savings certificates. More recently, on April 1, the RBI once again cut the Bank Rate, the CRR and the repo rate by one percentage point. This has further encouraged major banks to reduce their lending and deposit rates.
 
While there is an observed lack of responsiveness of investment to interest rate reductions, these cuts are resulting in two other tendencies. First, they are encouraging at least some small savers to move out of bank deposits and government savings schemes and into the stock market. Second, they are encouraging a range of players to borrow at lower interest rates and bet on equities. In sum, in the midst of the speculative boom in the markets, the government is channelising more money into stock market investments. This together with the signal it sent out by putting the tax notices on hold, have encouraged new investments in the market, resulting in a reversal of the April 4 decline in the Sensex. That reversal has only been aided by the fact that further news of robust growth in the US has resulted in a mild revival of the Nasdaq.
 
As a result both the Nasdaq and the Sensex have recouped some of their losses. This may be good news for now, but it implies that the much-needed "correction" in markets here and in the US is being postponed. In India this means that attention would continue to be diverted away from the real economy and the measures that are urgently need to spur real growth and deal with persisting poverty. That is the price the nation pays for being governed by those who are focused on shoring up the fragile world of finance.