Carnage on Dalal Street

Comment



Carnage on Dalal Street


Like the iconic and feminist advertisements for Virginia Slims cigarettes which used the tagline “You’ve come a long way, baby!” (1989-Leo Burnett), India too has come a long way. Such a distance, in fact, that any young person born in the 1980s or later looks on with wide-eyed incredulousness when older people describe the state of affairs in an earlier highly state-controlled India. Most of the Soviet inspired socialism of that earlier era has now been pushed into mofussil quarters or into the arcana of NGO-speak which feeds on the guilt of the possessed (of material wealth silly…). I am happy to report however, that this too is fading, as the practitioners of this kind of antique spiel are claimed/corrupted by the World Bank, anti-terrorist action, dementia, arthritis, inadequate fund-flow, bad infrastructure, old age and death. It’s a put-up-or-shut-up world now notwithstanding the catchy and true enough Abba caveat.

But what of the politicians, our powerful ruling gerontocracy, brought up on the fraudulent garibi hatao of those earlier interventionist but ineffectual times? That was a time when solemn agreements were not honoured in the name of social equality (abolition of Privy Purses), banks were nationalised to their enduring detriment and elected state governments were routinely ousted via the stratagem of imposing President’s Rule in states wherein the chief ministers had the effrontery to stand up for themselves. Recent mention of revelations made ages ago by US senator Daniel Patrick Moynihan and erstwhile KGB archivist Vasili Mitrokhin suggest there was also a lot of KGB and CIA inspired covert activity in India. Our elderly politicians and senior bureaucrats learned these covert ways and added them to the bother boot methods of colonial repression inherited from the good old Raj. They know how to employ pressure and intimidatory tactics to visit retribution on designated targets, using state instruments such as the IB (Intelligence Bureau), the CBI (Central Bureau of Investigation), the CBDT (Central Board of Direct Taxes), and the ubiquitous police of course.

These institutions are nail-studded and time-tested clubs to take out on a horse called plausible deniability, implausible as this may sound. And old habits die hard specially when there is a hyperactive media unable to resist the pressure of being blamed for misreportage and incipient hysteria.

Yesterday on Dalal Street it was as if these bad old days were back - with a twist. This was not like the police arriving in a Hindi film after all the mayhem is over. This was government as Gabbar, executing a pre-emptive strike, determined to be held blameless in the event of an incipient scam or two erupting in the highly bullish stock market (7,000 to 8,000 points on the Sensex in 51 trading sessions and 8,000 to 8,500 in just 8 trading sessions thereafter).

So, inept intervention it was, clubbing our stock market playing citizens, who are, after all, mostly not our 60% voting sum of rural brethren. The rural folk are generally held blameless at all times by the politicos, naturally permitted to have all the electricity and water they like for free apart from being exempted from all taxes and inconvenient questioning, pressures etc… They are, it must be remembered, large numbers of nice voting peasants and God bless them all.

No, this clubbing was directed unerringly at the speculators in our midst, ending up scaring the smallest and the weakest amongst them the most! When the carnage ended, practically every single stock was in the red - 2,503 out of 2,597 traded on the BSE (Bombay Stock Exchange), or 96% of the lot. In one day, Thursday 22 September 2005, 102,000 crores worth of investment was vaporised and market sentiment was delivered a numbing kick to the cods. If the market hadn’t run up as much as it has it might have proved truly unbearable.

Realising the overkill, particularly as a lot of this loss has been borne by the hapless if greedy small investor in penny stocks and mid-caps, the government was quick to deny that there was any planned or concerted action on its part. It denied the involvement of the prime minister’s office. The finance minister spoke up in soothing and dulcet tones from New York to aver there was no scam in the works and that the market was very well regulated. Bureaucrats intoned that the IT (income tax) raids on some “dabba” brokers (the ones, surprise surprise, that dealt in penny stocks for their clients without written records), on the very day, were, how shall we put it, purely coincidental.

The raids on middle-ranking builders suspected of routing large profits abroad through illegal Hawala (trust-based but highly efficient international underworld banking), channels, were also completely routine in nature. Market regulator SEBI’s (Securities and Exchange Board of India), special and unblinking watch on 50 penny stocks was also routine as were the stiffer margining norms even if the latter did dampen liquidity flows. The heavy hand on penny stocks, irritating as any cuff of one’s collar might be, at least on some of them, is not unreasonable. Some totally non-operational ones with no assets or net worth at all have contrived to run up trades at P/E multiples (price/earning ratio) of 60 or more. This, when big-cap Sensex stocks are trading at P/E multiples of no more than 16 or 17.

But of course there’s never a cloud without a silver lining. And so, the finance ministry let it be known that it was very pleased with the taxes being garnered from securities trading, thank you very much. Yesterday, because of the panic that resulted in over 40,000 crores being turned over, they made a neat 80 crores in a single day, thank you very much again.

The concern on the large use of Participatory Notes by FIIs (Foreign Institutional Investors), was also a routine expression, but intriguing because Participatory Notes allow FIIs to make purchases and sales on behalf of anonymous buyers abroad who however may not include NRIs (Non-resident Indians), people of Indian origin, subsidiaries of Indian firms etc… per the law. So there can’t be any Indians involved in all this Participatory Note trading from abroad can there? Hmm…

Nevertheless, it is reported today, the finance minister is readying his favourite device of the no-questions-asked Voluntary Disclosure Scheme to mop up just a little of all that most useful black money. He knows, perhaps from experience, that it is devilish difficult to follow a money trail for any distance and in the meantime he’s got a revenue stream to fill.

The FIIs, on their part, have already kicked in over US$8.5 billion this year into the Indian bourses as of September 13, 2005 (25% up on fiscal 2004 at the same time which garnered a total of US $8 billion for the year). At this rate, fiscal 2005 could end with FII investment of US $12 billion and its knock-on effect on the indices. But, wonder our suspicious mandarins of North Block, is this really FII money or tax-evaded Indian money being recycled via Hawala and the hey presto legitimacy of the stock market?

You may care not at all but the government does not want to be caught napping because the outside-support-lending Communists and the opposition, albeit in disarray, but such as it is, are liable to turn nasty if this can be established. However, the visit of the IB chief to Mumbai at this time, in preference to snooping on anti-nationals and the like on some mountain pass, was also, you guessed it, coincidental.

The thing is, the market, this government wants us to accept, has taken its worst single-day tumble since May 17, 2004, when it came into power with support from the comrades, quite on its lonesome.

At that time, 17.05.04 that is, the comrades had, in the “irrational exuberance” of their first flush at the remote controls, yelled that they would stop all privatisation, selling of PSUs, labour reforms etc… And now, on 22.09.05, here’s this “nasty fall” as Udayan Mukherjee, Stocks Editor of CNBC likes to call it. The government says it had nothing to do with it. The fall has been occasioned purely by the action of market fundamentals which called for a long overdue correction-what goes up must come down etc… Shitkicker inducements are a figment of the pink pressing imagination and financial journalists wouldn’t think like this if only they understood pink to be a socialist colour and nothing to do with the economy. It’s audacious and ham-fisted propaganda that flies in the face of all information known, but since when has the KGB taught its pupils anything sleeker?

But the point is about how things have changed. In the old days UTI (The Unit Trust of India), or LIC (The Life Insurance Corporation of India), would have been used to prop up sagging stock market indices and the RBI (The Reserve Bank of India), would likewise have been pressed into service to preserve the dwindling value of the rupee. Never the other way around, because the occasion to pour cold water on a raging bull would have seemed like the most garish of improbable fantasies. We never even mentioned our rate of growth in those days, stuck as it was between 1.8% and 2.00% despite humungous five-year plans weighty enough to sink the Bismarck. Some wags called it “the Hindu rate of growth” but it seemed incongruous to call it that when you compared the economy with the way the population was increasing.

Today, when we look at a routine of between 6% and 8% growth per annum in the GDP (Gross Domestic Product), our behemoth government agencies and leading PSUs (Public Sector Undertakings), are often strong enough to compete in the marketplace alongside international players and private sector operators. They too are complaining, being just as adversely affected by ham-fisted government intervention as anyone else. And the population, at a billion plus, is stable with much reduced birth rates…

The goodness of the India story may now be unstoppable, and some people, Japanese and Koreans included, know it. So fortunately, right through yesterday’s carnage, the FIIs, the MFs (Mutual Funds), the high net-worth individual investors and even some among the punters who would be potentates, held fast. Evidence is that the very day after, an end-of-the-week Friday to boot, the market is already picking up the pieces, shaking off Hurricane Manmohan (what’s in a name, we could call it the Chidambaram Temperum if you like).

Parts of the market must feel like a bull-dozed slum, but like slum dwellers used to unreasonable pogroms, the weakest sections are demonstrating resilience by getting their bits of figurative cardboard and string together. They were, in the end, defiant enough to close the day’s trade with most key indices marginally in the green despite a day of roller coaster volatility.

In a macro-sense, the government realises full well that there is good reason to be confident about the future. This prime minister and finance minister are both progressive reformers. The present boom in the stock market is at least partially attributable to favourable tax treatment of capital gains and no tax on dividends introduced by Mr. Chidambaram. Low inflation and low interest rates have also played their part. The prime minister and finance minister have gone out to sell the India economic story abroad, travelling out to make the case at Davos, at the NYSE, at NASDAQ, in the US Congress, to the European Union, in Singapore, in Iran and to the G-8. They have not been shy to ask for a permanent seat at the United Nations Security Council in recognition of the India story and for nuclear powered electricity as well. It is working too and that is also why so many of the big boys keep coming a calling to give the Rashtrapati Bhavan staff such a lot of practice.

In systemic terms too, the government has been making significant moves in a steady stream to improve the flexibility and resilience of the market. They have, for instance, recently allowed MFs to invest in derivatives on equal footing with the FIIs. Come October 10, 2005, it will be possible to participate in our Futures and Options sphere on the Nifty, from Singapore, buying contracts in US dollars. Again, as far as Singapore is concerned, anybody can buy these contracts, but is India going to get the heebie-jeebies again worrying whether it’s Hawala money coming in? It doesn’t matter a whit to the bourse action of course.

But this kind of paranoid thinking, if it operates, will be the consequence of left-over mind-sets from the “command and control” days of the statistician Mahalanobis and we all know what it got us, (yes, a hundred years behind in everything except for IT- Information Technology-which no-one knew how to regulate and therefore screw up). Fact is, collection of taxes is a different issue from the welfare of the bourses and like everything that is antiquated in our country, the entire system needs major reform. But we cannot afford to wash one into the other and thwart our destiny. This would be comic if you want to laugh or horrific if you prefer darker fare. Either way, it would be short-sighted and counterproductive.

For the immediate future, as a pick-me-up, the second quarter corporate results too are expected to be encouraging. And as the finance minister said today as part of his soothing balm talk, the markets may have been doing no more than anticipating these in terms of its sharp upturn. However, truth be told, the bourses have not taken much stock of sharply rising global oil prices and its knock-on effect on inflation and possible economic slowing of late. Nor has it bothered its dizzy little head on the devastation caused to refining capacity and the dominant US economy by Hurricane Katrina and Hurricane Rita currently due to smack into Texas over the weekend.

But, what the hell, after Hurricane Manmohan, Indian stock market types are properly shaken and stirred a plenty. Strange thing to say with a Sardar as prime minister, but after this drubbing, it will probably be a while before they feel balle balle again. Mission Wet Blanket has been a total success. The Left should be happy. All that’s happened is a lot of decadent capitalists and their running dog followers got the shit kicked out of them. It’s good, because as the saying goes, if it doesn’t kill them it only serves to make them stronger. So, let’s hear it for strength and here’s to resuming the northward climb with less paranoia.


(2,453 words)

Title: Carnage on Dalal Street
By Ghatotkach
Friday, 23 September 2005

This and all original essays on GHATOTKACHSERIES are copyright 2005 by Gautam Mukherjee. All Rights Reserved.