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The week ended April 30 witnessed
a collapse in India's stock markets. On Wednesday, April
27, the Sensex fell by 213 points, wiping clean an estimated
Rs. 55,000 crore of paper ''wealth''. This was the largest
single-day decline in over three years. Over the rest
of the week the markets moved further down, indicating
that ''Black Wednesday'' was possibly not just a stray
blip on the trading screen. With evidence that foreign
institutional investors who were earlier pumping foreign
currency into India's markets were holding back, the
rupee too witnessed a reversal of the rise that excess
dollar supplies had been resulting in.
There is unanimity among ''analysts'' of the factor
driving the downturn: news from the exit polls – the
most ''scientific'' of available predictions – that
the NDA is unlikely to win a majority in the elections,
which may throw up a hung Parliament. In the run up
to the elections, India's ''upper crust'' – consisting
of ''the markets'', the media and large sections of
the urban middle class - had convinced itself that the
results of the elections were a forgone conclusion:
the NDA would form the government; only the margin of
victory was a matter for debate. The initial opinion
polls only confirmed this belief.
It is therefore not surprising that the results of the
exit polls at the end of two rounds of voting came as
a shock. To boot, subsequent opinion polls have also
pointed to a lower vote and seat share for the BJP and
its allies in the remaining two rounds. This rather
convenient shift in opinion poll results has allowed
the media to portray the signals from the exit polls
as being the result of an end-of-game change of mood
that the earlier opinion polls could not capture.
If the dramatic shift relative to those early opinion
polls does in fact materialize, it would be hard to
explain, even by taking resource to the Rahul-Priyanka
factor or some such imponderable. With little having
changed in terms of the policies, structure and disunity
in the Congress, and all the major non-Congress players
having been on the scene right from the start, the truth
would be that India's upper crust had got it wrong.
It had failed to sense the mood of the ''other India'',
which was unwilling to go along with the celebration
of the NDA's rule and policies that the explicit and
implicit ''India Shining'' campaign involved.
What is noteworthy is the quick response of the market,
which has declared its displeasure with actions that
not only erode the wealth of its own constituents but,
through their impact on credit and foreign exchange
markets, threaten a crisis in India's liberalized financial
sector. Market developments over the week ended April
30th cannot be explained by the stray action of a few
unhappy and/or nervous investors. The herd instinct,
so typical of financial markets and especially of foreign
institutional investors, has resulted in concerted action
that threatens a sharp decline. And in India's markets,
which are neither wide nor deep, a small herd can make
a big difference.
On the surface, an early correction of the baseless
expectations of a few financial investors should not
be cause for worry. Few can demonstrate that India's
till-quite-recently inactive financial markets drive
the economy. However, the problem is that the crises
that such changed expectations resulted in elsewhere
in East Asia, Latin America, Eastern Europe and Turkey
show that they tend to damage the real economy as well.
Moreover, when the crisis of finance becomes a crisis
of the real economy, its burden falls disproportionately
on the poor and the lower middle classes, even though
they do not participate in or often are not even conscious
of the workings of financial markets. Having invited
foreign financial investors into their economies, countries
find that ignoring their sentiments and/or closing the
door on them when they retreat, involves painful adjustments
that the people, and therefore democratic governments,
find hard to face up to.
This feature of the play of fluid finance has become
a source of power for financial interests. The threat
of exit and of a consequent crisis is now routinely
held out as reason to do anything that whimsical financial
interests demand. This threat is not just implicit,
as revealed by the actual experience with the withdrawal
of financial investors from one or the other emerging
market. It has in recent times become quite explicit.
We only need to recall the financial drama that preoccupied
Brazil as it became clear that Lula and his Workers'
Party would win the polls in 2002. To prevent fear of
a crisis from changing the electoral result, Lula had
not merely to promise to refrain from doing anything
that would upset international finance, but also, after
his victory, implement a substantially diluted and pared
down version of his original manifesto.
The signal sent out on the Black Wednesday of the last
week of April in India was similar. By threatening a
pullout if expectations of an NDA victory were not realized,
those who sway those markets, especially international
financial investors, were sending out two signals. First,
they were signaling the electorate that any outcome
that is not in keeping with the expectations of finance
and the ''upper crust'' can be damaging for all. Second,
they were signaling any possible formation other than
the NDA that may in fact come to power after the elections,
that statements and policies that displease finance
could be suicidal.
The BJP, which has all along been making a case for
an electoral verdict that strengthens its (and not the
NDA's) hands and allows it to continue the policies
that in its view make India shine, has been quick to
exploit these signals from the financial markets. For
example, on April 30, BJP President Venkaiah Naidu,
on the campaign trail in Jaipur, declared: ''The market
reaction to the (exit poll) predictions give an idea
how the economy would respond when the BJP and its allies
appear weakened. The poll predictions have made the
economy suffer. The markets have crashed and the rupee
value has come down and this is only a trailer.''
This use of market sentiment as a vote-gathering device
is in keeping with the collusion between the NDA government
and financial capital. The BJP-led NDA government has
been blatantly ''market friendly'', keen to placate
big business and international finance and desperate
to resolve its budgetary difficulties by selling some
of the most valuable and profitable of public sector
assets at extremely attractive prices. Foreign players,
whose presence in India's financial sector has increased
substantially as a result of liberalization, and Indian
big business, were the biggest beneficiaries. So were
those who managed or facilitated their investments.
The exit polls hold out a threat to those profits. A
hung Parliament would undoubtedly delay the process
of government formation and make policy-making a more
democratic and consensual, and therefore a slower and
perhaps less market-friendly process. It is the latter
which has upset those who people and invest in India's
markets. They have for the last five years become attuned
to policies that have made India the flavour of the
season for international capital, especially mobile
financial capital that has diverted huge investments
into India's lucrative markets and fattened India's
foreign exchange reserves.
This discovery of India by international finance explains
in part the ''India Shining'' ethos and the confidence
in the NDA among the nation's upper crust. The increase
in liquidity that capital inflows resulted in triggered
a housing finance and consumer credit boom in the non-agricultural
sector. Coupled with India's software and outsourcing
''mini-revolution'', it helped create a booming enclave
economy.
Besides those who directly profited from these developments,
there were others who were gainers in this new situation.
A relatively small group of middle class Indians gained
access to better paying service sector jobs. Their incomes
and the easy availability of credit finance allowed
them to consume a host of commodities that invaded India's
shopping malls after liberalization. In pre-liberalization
India, middle class success depended on entry into government
or migration abroad. Now, private sector employment
at home promised a taste of the lifestyles that successful
migrants led outside the country. The short span of
time in which this transformation occurred held out
a hope for others, who expected the boom to persist
at least till they found themselves a slot in the charmed
circle of India's post-liberalization elite.
It must be said that the boom in the liberalization-created
enclave not only generated some demand elsewhere in
the economy, but also drew other sectors into its fold.
Principal among these were the media, which not only
thrived and proliferated because of the advertising
bonanza that the boom generated, but financed their
expansion with the help of the liquidity that financial
liberalization provided.
Unable to see beyond their own circumstance, these sections
that have come to benefit from the new regime did believe
that governance in India had changed for the better.
If in addition, the opposition was disunited and the
Congress in disarray, victory for the NDA seemed inevitable.
What was missed was the damage that the NDA government's
policies had done in terms of the worsening livelihoods
of the farming community, the displacement of already
employed workers, the fall in the rate of generation
of new employment opportunities, the increases in the
cost and decline in the availability/quality of public
services and the collapse of the small business economy.
The losers inhabiting this large universe, the other
India, could be voting against the NDA even if not for
the opposition, if the exit polls are right.
When the NDA came to power, the perceived danger was
a widening communal divide, which has indeed materialized
and marginalized the minorities. What was not expected
to the same degree was the widening economic divide,
which has remained relatively unnoticed, but is becoming
visible as the exercise of winning the voter has proceeded.
The signals the markets are sending out midway through
the election process is that even if the evidence points
to the fact that this division makes it difficult for
those who widened it to remain in power, the policies
that create the divide must remain in place. What matters
is the success of the enclave that liberalization generates,
not the well being of the rest who must be coerced into
voting for governments and policies that surrender sovereignty
at their expense. The exit polls suggest that the ''other'',
predominant India may be unwilling to submit to these
authoritarian ambitions of finance capital. |
