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.
But otherwise, the current downslide in the stock markets is really not
a matter of serious concern for most Indians, and it should certainly not
be much of an issue for the new government either. The mainstream English
language media, whose business interests increasingly coincide with those
of finance capital, may continue to shout itself hoarse about it. But then,
as the recent electoral cataclysm has shown, these media also do not reflect
the interests of the Indian people, nor do they even understand them.
May 17, 2004. |
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