Booming Indian Bourse:
Illusion And Reality
By Girish Mishra
February 20, 2006
The sensitive index of the Bombay Stock Exchange, during the first week of February 2006, performed the much-awaited feat of crossing the 10,000-mark. This brought great joy to industry and trade. The media, both the print and the electronic, were so overwhelmed that they began jumping. It needs to be remembered that most of the media are controlled by Indian big business with growing penetration of Anglo-American capital in recent times. They have begun creating a false hope among the middle class people that they would be millionaires over night. Maybe, if no collapse occurs in the near future, one may witness the scenes that took place in France and England during the 18th century in the wake of the Mississippi Scheme and the South Sea Bubble respectively. The government, especially its finance minister, regards it as the vindication of the policies of ‘liberalisation, privatization and globalisation’.
If one looks slightly deeper, many things become crystal clear, underlining the fact that what is being propagated is seer illusion with not much connection with domestic realities. To begin with, the organized sector accounts for just 10 per cent of the Indian economy and the corporate sector counts for even much less. The sensex is no indicator even of the health of the corporate sector, much less of the organized sector, as it takes into account only 30 companies. The sensex was constructed in 1985 with 1979 as the base year.
The first big boom in the stock exchange was witnessed in the early 1990s when the Narasimha Rao government was in power and Dr. Manmohan Singh was its finance minister. Soon after coming to power, the government embarked on a programme of economic reforms, informed by the Washington Consensus. Doors were being opened for the entry of both foreign direct investment (FDI) and foreign institutional investors (FIIs) so that surplus capital could flow into India to earn relatively higher returns. To win the confidence of foreign capital wide-ranging changes were initiated in economic policies. When in 1992, the sensex crossed the 1000-mark it was trumpeted as an indicator of the success of economic reforms, initiated by the new government. A veritable mania seemed to have gripped the middle class, and all and sundry appeared to be running to buy indiscriminately shares, bonds and debentures. The offices of brokers and self-styled consultants witnessed lots of such eager investors.
This situation, however, did not continue for long. There was a collapse and many investors, mostly from the lower rungs of the middle class, were financially ruined. It turned out that the entire boom was a result of manipulations and frauds perpetrated by a group of racketeers, headed by Harshad Mehta, a broker from Mumbai. Of course, a number of banks, both Indian and foreign, along with some financial institutions had actively connived in this racket. It became obvious that the boom was no approval of the economic policies of the government of the day. At the hustings, the government was defeated and so was its finance minister. It needs to be borne in mind that the finance minister who was rated highly by the media and the Fund-Bank lost badly in the South Delhi Parliamentary Constituency, which is a highly educated and prosperous area, at the hands of a mediocre. It appeared that the people at large expressed their disapproval of the economic policies, pursued by the government.
The small and medium investors burned their fingers so badly that they have not, till now, returned to the stock market. The coalition government that came to office under H. D. Davegowda did try to revive the bourse by luring the disenchanted investors. Its finance minister P. Chidambaram’s “dream budget” did succeed for a while to prop it up and the sensex climbed up to 4305.8 in 1997. After an interval of three years once again some sort of boom appeared and the sensex rose to 5447 in February 2000. This also, however, proved ephemeral and it began sliding and came down to 3300 in April 2002. This downturn stopped only in June 2003 when the sensex resumed its upward journey and came to 5838 in December 2003 and 6112 on January 9, 2004. This boom was mistaken by the then BJP-led government as a firm indication that India was “shining” and the people were happy with its policies and performance. It called for a general election six months earlier than the scheduled date. The result was disastrous as it was voted out of power.
On May 17, 2004 when the news of the defeat of the ruling BJP-led coalition came, the sensex went down by 565 points. Obviously, both Indian big business and the FIIs did not take kindly to the defeat and coming to power of the Congress-led UPA (United Progressive Alliance) government, supported from the outside by the Left. It was propagated that India was set to return to the old Nehruvian model. The sensex continued its downhill journey for months. Meantime, some astrologer in whom the previous coalition and its leader had great faith predicted the imminent collapse of the UPA government because its survival was predicated upon the support of “untrustworthy” leftists. Thus a cloud of uncertainty hovered over the stock market. It so happened that, instead of the UPA government falling, the concerned astrologer landed himself in a hospital after a heart attack. The previous coalition and its leaders were forced to change their strategy and tactics; they ended the boycott of the Parliament and returned to take part in its proceedings.
When it became clear that the UPA government under Dr. Manmohan Singh and with P. Chidambaram as finance minister was to pursue the Washington Consensus-based economic reform programme with greater vigour and with more political and social stability as the tensions created by the previous government’s divisive policies were to be totally defused and the damages inflicted by it to be repaired, the sensex began its upward thrust. The result is there for all to see.
The present boom must not be taken as a reliable indicator of the state of the national economy and of improvement in the economic plight of the people at large. The main factor behind the present boom must be a cause of concern. It is beyond doubt that increasing interest of the FIIs in Indian stocks is a decisive factor behind the boom. They have large amounts of surplus financial resources, which can be deployed in Indian securities to earn quick bucks. India, with its expanding market and political stability, attracts them more than various other countries of the world. Between June 2003 and June 2005, they put in $17billion in Indian securities. The increasing inflow of the investments by the FIIs was the main factor pushing the sensex to 7000 in the third of June 2005. The media mistakenly gave the credit to the settlement of family feud of the Ambanis.
It is instructive to note that the grip of the FIIs tightened over 83 big Indian companies. They could influence their management in a decisive manner. The investments of the Indian people increased only in 21 companies. In all, foreign investors came to have a decisive voice in one third of the most profitable companies of the country. In the Bombay stock exchange the securities of 1600 companies are regularly traded, as many as half of them are clearly under greater influence of foreign investors as compared to Indian founders and promoters. Among these companies are: Bharati Tele, Grassim Industries, Gujarat Ambuja Cement Limited, HDFC Bank, Hero Honda Motors, Hindalco, Infosys and Satyam Computers.
It is widely believed that the FIIs have become a safe conduit for the return of the laundered dirty money belonging to Indian capitalists and other big wigs. It is supposed to come with the help of Depository Receipts. One may refer to Raymond W. Baker’s Achilles Heel: Dirty Money and How to Renew the Free-Market System to understand the generation of the dirty money, its laundering and its transmission back home. A recent article in the Hong Kong-based Asia Times Online has given startling details in this regard.
From the above, it follows that an unholy alliance has been forged between the FIIs and Indian capitalists, which may prove harmful to India’s national interests. Second, gradually, foreign investors have begun exercising control over India’s corporate sector. Maybe one can term this as imperialism through backdoor. Last, the boom hinging on FIIs may not last very long. Once they see greener pastures, they will certainly emigrate, leaving grave consequences for the Indian economy.