The Hindu Business Line : The market is nervous

ANY ASSESSMENT THAT Friday's steep decline in equity values at the nation's bourses is one of those routine gyrations would obviously be naive; but the many who believe that it is the result of a conspiracy of vested interests disappointed at the BJP-led National Democratic Alliance being voted out of power, would be wrong as well. For such an assessment not only ignores the quantum of variation in the instant case but also the change in underlying fundamentals, as perceived by the market. With an average decline of 6-7 per cent in value across pivotal stocks, the crash was, indeed, exceptional.

The former Finance Minister, Dr Manmohan Singh, who most certainly crafted India's economic reforms in the 1990s, claimed rather famously once that he wouldn't lose sleep over what happens in the stock market only to find, days later, one of the biggest stock market scams hitting the country. To be fair to Dr Manmohan Singh, he was perhaps only indulging in a bit of rhetoric that is not altogether unusual in political debate. But the image that stuck to him was of someone who was indifferent to the goings-on in the market despite being well aware of the potential ruin that a large number of small investors faced. The episode has lessons for the would-be policy-makers of the country today. For all the criticism of the stock market as an arena of fickle minds, the players are capable of, and indeed often do, send out signals about changes in the underlying fundamentals of corporate earnings and, by extension, of the economy.

The market is clearly nervous now. And it is not just about whether there should be a Ministry of Disinvestment to preside over the sell-off of government holdings in business enterprises, although the crash might have been triggered by concerns over the fate of the divestiture in PSU stocks in the oil and the financial sectors. The market's concerns run far deeper. For instance, it is by now very clear that the new dispensation at the Centre would have some role for the Left in the policy formulation. In the event, it would be straining anybody's credulity to say that in matters of economic policy there would be continuity of the NDA line. How, for instance, is the new government will reconcile its commitment to ushering in reforms with a human face, as the cliché goes, with the need to ensure fiscal rectitude?

Some indication of the scope for massive fiscal imbalance that could be unleashed is already in evidence in the decision of the Andhra Pradesh Government, that has just been sworn in, to give free power to all farmers. It is not subsidies alone. The parties likely to join the government at the Centre are also committed to hiking substantially outlays in irrigation and other sectors that improve the conditions for agriculture. Would this set off a fresh doses of corporate taxation if personal taxation is not to be raised? These are not frivolous concerns, and unless immediately addressed, the correction in equity values that happened on Friday would have set in sooner or later.

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