UNSEASONAL THOUGHTS - What goes up in the share market could come down as easily

Ashok Mitra
The Telegraph, 12 October

Run-of-the-mill Indian investors, mostly from middle-class households, have of late learnt to recognize the colour of money. They cannot quite believe their fortune. Their sense of daze is understandable; the sensitive index is hovering around the 18,000 mark, and the Nifty too is on a vertical binge. If there is heaven on earth, it is here, it is here.

August was a bad month: share prices dipped, our simple-minded investors were told, because of some crisis in what is described as the ‘sub-prime’ mortgage market in the United States of America — not that they understood what it meant. September however was a different story; Ben Bernanke, chairman of the US Federal Reserve Board — that country’s central bank — waved his magic wand and, hey presto, Indian investors are experiencing an unprecedented burst of prosperity.

It is indeed Bernanke’s decision to pare the American prime rate of interest by 0.5 per cent, which has been responsible, in the globalized milieu, for a chain of developments. Institutional investors, with huge reserves of footloose short-term capital, moved out of US shores in search of better returns, and proceeded towards the direction of Asian bourses. A major part of these funds has preferred to park in Mumbai. Once the foreigners started purchasing briskly at Dalal Street, domestic institutional investors joined the fun and games; petty investors naturally climbed on the bandwagon.

The small time investing householders are not trained to worry over the flip side of events and things. Share prices have soared not on account of any qualitative improvement in the performance of the Indian economy, for instance, a buoyancy in the rate of industrial growth. This rate has actually dropped in recent weeks compared to what it was about this time last year. The bull run is exclusively the gift of foreign institutional investors. They have acquired a tight grip over our share markets; close to two-thirds of the current daily transactions taking place there are on their behalf. Their presence in other Asian markets pales into insignificance when one considers the extent of the influence they have come to acquire, in the course of the past decade, over the Indian bourses. The signals they beam are obsequiously followed by domestic institutional investors, including the mutual funds; the petty species immediately get to know what their pickings should be. With the lowering of the interest rate in the US, firms like Morgan Stanley and Merrill Lynch became over-active in the Indian markets that are anyway under their total control. Should their mood change following, again, some domestic developments in the US, or for other reasons, funds might as easily move out of India, thereby sending shivers down the spine of Dalal Street.

Retail investors cannot be expected to be overly exercised over the complexities of international capital movements. But what about the country’s authorities? Somebody somewhere over here has to be concerned about the implications of the effective take-over of our stock exchanges by foreigners, who have purchased into the stocks of several leading Indian corporate entities. Such across-the-board equity purchases have taken place in textile and pharmaceutical units as well as in heavy and light machinery manufacturing concerns, and have even extended to the information technology sector. Foreigners have bought significant slices of equity of Indian banks, too, even of banks nominally in the public sector. The ownership pattern in the Indian corporate sector has, as a result, changed drastically in recent years. Notwithstanding the Reserve Bank of India and the Sebi having the basic data, there is an evident reluctance to process them and share the findings with the nation. One is left wondering whether this is plain lethargy or an aspect of creeping compradorism.

In case vigilance in such matters is casual or perfunctory, foreign investors, depending upon their whims — or worse, their carefully worked-out strategy — could target particular corporate entities. They might all of a sudden decide to unload sizeable shares they had acquired earlier of a corporate body; the scare that would follow could be ruinous for the company. Were they to target a bank, the repercussions could be far more severe due to ripple effects across the economy; small investors would then learn to their cost that what goes up can as easily come down.

There is a grimmer possibility. India is not sui generis: there is no reason to assume that what happened in east Asia during 1997-98 cannot occur here. Since foreign institutional investors have captured the commanding heights of our stock exchanges, they could target the entire corporate structure. They might any day choose to take out of the country something around $50 billion by encashing a substantial part of their equity holdings; the share market edifice itself could then collapse in the manner of a house of cards. The corresponding abrupt fall in our foreign exchange holdings could, who knows, lead to the pressing of panic buttons in several other spheres.

Cassandras are not popular characters in any clime. Even so, it is of crucial importance that the consequences of allowing foreigners to walk all over our share markets be examined with some care. At the least, sterner measures of both exchange control and share market regulations are called for. But apart from a routine warning to the small investors to be careful, the finance minister has done nothing; he has perhaps neither the courage nor the inclination to embark on effective steps to ensure national interests.

And while Indian investors gloat over the bonanza that has come their way due to the decline in the American rate of interest, some other implications of this kind of symbiotic relationships can scarcely be ignored. Consider, in this context, the uncertainties prevailing at the moment in the US labour market. Breakneck technological advance in that country has intensified the demand for scientists and technologists with specialized skills. Those possessing such skills are driving a hard bargain, casting a shadow on the profit margin of entrepreneurs. The problem has been sought to be tackled through extensive outsourcing of work to relatively cheap labour overseas who possess similar skills. This has led to tension with the American polity, with allegations posted that foreigners are being used as skivvies and US citizens are being shut out of jobs. Pressure is mounting at different levels to reverse the culture of outsourcing. In their search for alternative means to protect their profits, American industrialists are investing heavily in technologies that are even more capital-using and labour-saving than is the state at present. To facilitate such investments, the Federal Reserve Board could be inveigled into lowering further the interest rate. Ben Bernanke’s predecessor, Alan Greenspan, as chairman of the Federal Reserve Board, had in fact gone on record: the rate of interest might even be slashed to zero if that would help American industry.

One spin-off of continual reduction in the American interest rate would be further influx of foreign funds into India; foreign institutional investors would then, really and truly, gobble up our entire financial sector. It would, however, be a bad omen for our IT sector: the flow of outsourcing from the US might dry up.

Finally, a thought for those peasant leaders who have been advising our farmers to sell off their land, place the sale proceeds with banks, and enjoy high life from the interest that would accrue. Were the Americans to persist with their policy of cheap money, given the tight global — or, shall one say, neo-colonial — fit, the RBI would follow suit. Interest earned by farmers, who sell their land and put the money in fixed deposits, would as a result dwindle to next to nothing. That would be the end of the role of peasant leaders as economic advisers.