Under-utilising bourse power circa 1997

Under-utilising bourse power


Nobody said an economy has to be in the pink before the investors get interested. But it is necessary to look promising if there is to be any enthusiasm. Money being an essential coward has no desire to languish in uncertainty. The pressing need in India is investment in infrastructure, as the deficits in areas like electricity threaten to engulf us. However, no seasoned investor feels happy to venture into a long term investment if policies are half-hearted and deeds do not match words.

The world regards India and China as the two greatest potential markets where even a low penetration rate for goods and services could dwarf much higher percentages elsewhere. But there is a proverbial catch–we Indians cling to a host of provisos and codicils when we liberalise our economy. This way we land up being neither fish nor fowl. China, on the other hand, has brazenly divorced ideology from economics and created a vibrant growth scenario as a consequence.

Take the progress of the Indian stock market in recent times by way of contrast. The Government has studiedly inferred that the stock market is no barometer of the real economic ground realities. What this means is quite unclear. It implies that the bourses should fend for themselves without government aided succour. Yet, it predicates its own investment plans on what they can hive off in the self-same bourses. They also regulate it mercilessly. This is truly baffling. Do we want to make money or do we not? Is it a free market operation or the old licence-permit Raj?

Realising from time to time that it has gone too far when the stock market heads steeply southwards, the Government makes conciliatory noises. Lately, there are new hints and portents and the market is somewhat enthused but the measures are never more than half-loaves. The badla issue has gone the whole distance for two years only to come back to the point where it started. An ill-conceived MAT and tax on exports has proved counter-productive because they are virulent anti-growth measures. Where does this retrograde thinking come from? Is it because of some confused notion of social justice, in theory! Because, in practice, we have one of the most profligate governments in the third world with no care about its own expenditure whatsoever.

The powers-that-be must realise that the share price indices are not only a product of speculation and the gambling instinct but also of solid achievement in one of the top 20 among industrialised nations. The sensex is like a referendum on the performance of the economy of-the-day, as the potential of the nation. Should it then be treated so cavalierly- being wooed one day and spurned the next?

Once again, we are on the threshold of a rescue package of sorts expected in the budget presentations of 1997. We are also in the 5oth year of our independent nationhood. It might be opportune to divorce political short term gains from the workings of the greatest potential engine of growth the country could wish for. The stock market could surpass the banks and lending institutions if the Government made the right moves to encourage it.

It is true that the foreign investment which could flow into a resurgent stock market cannot build power plants or ports for us. But if the FIIs are able to make money in a buoyant stock market, they can work as goodwill ambassadors in favour of India. There is a well worn adage that goes “money talks”. If India is seen as a destination second to none in 1997 on the stock markets, it is likely that the foreign direct investment waiting in the wings will follow suit. The paranoia which attends the idea of “capital flight” has more to do with no hope situations than a bright bouncy capital market.

The situation is ripe because masses of well configured company stock is beaten down to historic lows and the price earning ratios are very tempting. The worry is that bottomed-out as the market may be, how long will it be before the gravy train rolls around! The Government has the answer to this question.

Are they going to take out double taxation on dividend? What about MAT? Dare we hope for the old badla which everyone understands? Will they put in a small 10 per cent of the vast reserves of providend fund money into the bourses? One sincerely hopes that the Government makes some bold moves.

The small investor who used to wait patiently in the sun in serpentine queues to invest in primary issues has been vanishing fast. Many are nursing grievious wounds from a stock market that has eroded their capital by over 50 per cent. Apart from naively believing in the much touted “equity cult”, he had brought himself to risk his arm but has been looking at his stock market affair as one of the more ruinous things he ever did. Why should this be allowed to continue if the Government objective is to make companies raise their own capital from shareholders?

A buoyant stock market will also bring down the high interest rates on fixed term investments which is dangerous in the long run. A thriving equity cult can do wonders for revenue deficits with low taxation as a mate. In the end, equity is shared risk in the enterprise that people can take. What they want out of once and for all is the strangulation provided as an unwelcome bonus by inconsistent government policy.

(915 words)

By Gautam Mukerji
First published in THE PIONEER <>as the lead Edit article on February 15th, 1997