| Financial
profiteers are once again seeking to influence economic
policy in their favour. On Friday the 14th of May, the
Bombay Stock Exchange Sensex collapsed by 330 points
to 5069. The media headlined this development, highlighting
its magnitude by focusing on the fact that it was the
biggest single-day decline in four years. One financial
newspaper, the front page of which is an insult to the
intelligence of anyone whose eyes may set on it, banner-headlined
its estimate that the fall had wiped out Rs. 1,00,000
crore of paper wealth.
A collapse of the Sensex per se should bother none.
The 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. Therefore, 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 capital gains. That such speculators dominate
the market and can indulge in deception to earn their
profits is clear from the multiple instances of accounting
fraud and market manipulation that have recently come
to light in instances varying from Enron to Merrill
Lynch. These 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. What 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.
However, market analysts and the media have gone to
town suggesting that the reason for the May 14th collapse
were statements by leaders of the left parties that
the new government should shut down the separate Ministry
for Disinvestment created by the NDA and revise the
policy of privatising profit-making public sector units.
This may well be true. But it is important to pose the
right question. Was the ''error'' that triggered the
market's fall attributable to the leaders concerned,
who were merely articulating their well-known positions
on a controversial matter like privatisation, or to
the knee-jerk reaction of speculative investors who
were hoping to reap huge profits out of further doses
of privatisation at bargain prices?
It is clear that although dissent over disinvestment
was the specific trigger for the May 14th decline, 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. Thus, 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. The 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 luxuries.
Such 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.
Further, similar 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 subsistence.
All 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.
Any 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
its cause. In fact, sections of the media that had celebrated
neoliberal economic reform under the NDA, have implicitly
declared that all of the policies noted above can be
a cause for market distress. The markets are nervous,
they argue, because of uncertainty about the attitude
of the new government regarding the ''economic reform''
process.
Note the use of the word uncertainty. 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. The 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 neoliberal economic policies
of the NDA government on rural India and the poor and
lower middle classes in urban India. That 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. Given 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 major reversal of certain
components of the NDA government's economic reform are
inevitable.
Thus 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. Those 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.
Seen in this light, the message that has been delivered
by the ''markets'', and sensationalised by the media
ever since the exit poll results suggested that an NDA
victory is not certain, should be dismissed as undemocratic
and unacceptable. But the matter is not as simple as
it may seem. The real difficulty arises because, enticed
by the lavish returns that the policies of the NDA government
promised, foreign institutional investors have poured
investments into India and come to occupy an influential
presence in the markets. These investors are known to
have brought in over 10 billion dollars into India's
stocks markets during the last financial year. When
they choose to sell out, convert their rupee gains into
dollars and exit from the Indian market, the demand
for foreign exchange tends to increase. In India's liberalised
foreign exchange market this weakens the value of the
rupee, as seen in the significant decline over the first
fortnight of May 2004. Movements of this kind can trigger
a speculative attack on the currency and threaten a
currency collapse. That possibility has substantially
increased over the last one year because, drunk with
the hype that India's rising foreign reserves generated,
the NDA government has significantly liberalised capital
account transactions and allowed Indian residents to
legally and otherwise transfer their wealth out of the
country. Hence, if a speculative attack on the rupee
results in capital flight, domestic wealth holders may
join the herd and help precipitate a crisis. A currency
crisis of this kind can have damaging consequences for
the real economy, necessitating painful adjustments
even in countries where the real economy was initially
doing well.
Thus, it is not the losses suffered by investors in
the market as a result of their unwarranted expectations
that are the problem. It is really the fact that FII
investors whose expectations had fuelled the speculative
highs the markets had reached can damage the real economy
to an extent greater than what was achieved under the
NDA. To boot, it appears that even a mere restatement
of the well-known positions of individual parties that
would be associated in some form with the post-poll
government can trigger a market collapse.
This has some lessons for policy in the days ahead.
The patently irrational behaviour of finance cannot
be allowed to influence policy making, since that would
amount to allowing the authoritarian ''mandate'' of
a miniscule minority of speculative wealth-holders to
overturn the democratic mandate of the majority. Since
the actions of the minority of wealth-holders threatens
to diminish the manoeuvrability of the new government
and undermine its ability to fulfil the people's mandate,
the authoritarian threat from finance needs to be met.
The response should not be to dilute the thrust and
efficacy of a new economic programme, but to bolster
it with controls on currency and capital movements that
restrict speculative activity and restore power to the
levers of economic policy. There is a large menu of
polices to control speculative capital flows and stall
speculative attacks on a currency that is available
in the books. At the time of the Asian financial crisis
President Mahathir of Malaysia experimented with some
of these in a small way with much effect. There is no
reason why the new government cannot use similar means,
with greater vigour, to deliver on the promises that
won it a mandate and demonstrate the vitality of Indian
democracy.
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