The Hindu Business Line : Sense from Sensex — Don't just keep count, keep abreast

As the stock market soars, it is the responsibility of policy-makers and stakeholders of all descriptions to steer the bourse and the goings on there in the right manner and direction. Their duty is to see that the Sensex does not soar for the sake of soaring, but to some definite purpose to, for instance, add to the stability, sustainability and strength of the various sectors of the economy towards which the invested funds are flowing, says B. S. Raghavan.

INDIA'S ECONOMIC players are on a high simply because the Sensex looks like scaling unprecedented heights. The euphoria is so great as to make them already talk of numbers beyond 11,000 to be climbed in a few months, if not weeks. This bears no relation, they assert, to the manipulated stock market boom of 1994, nor to the subsequent dot.com bubble; this time it is for real.

The volume and variety of transactions are born, so it is said, not out of volatility and speculation, but out of informed judgment.

They are a genuine reflection of the trust and faith foreign and domestic investors have in India's continued progress on all fronts translating itself into an estimated high earnings growth rate of 12-18 per cent in the next five years. The promise of an economy growing at above 8 per cent and inflation maintained at 5-8 per cent is also driving investor sentiment.

Sensex is getting a further boost from lot more investible money sloshing around.

Profits have been rising in 2002-05 at a remarkable 25 per cent, due to a downward trend in operating costs, reduced provision for depreciation and low interest rates.

Given India's impressive record of savings, a steady channeling of as little as one per cent (Rs 7,000 crore) of them into stock markets is enough to keep pushing the Sensex Northward.

Double-edged weapon

But halt! There is one common dictum applicable to riding a frisky horse and the crest of a wave: In both cases, the rider should be, and should be seen to be, in control, and not let himself be taken for a dummy who does not know where he is heading or when, unbeknownst to himself, he is liable to be thrown off his balance. The responsibility of policy-makers and stakeholders of all descriptions does not, therefore, stop with merely watching the happenings in the stock market, but steering them in the right manner and direction. Their role is not just to keep count but to keep abreast. It is their duty to see that the Sensex does not soar for the sake of soaring, but to some definite purpose.

That purpose is to add to the stability, sustainability and strength of the various sectors of the economy towards which the invested funds are flowing. Market being flush with funds is not an unmixed blessing; it is, in fact, a double-edged weapon. It can either help in building productive capacity, making good deficiencies in productivity, research, and technology, enhancing competitiveness, and acquiring the stamp of world class, or result in the frittering away of resources in reckless ventures; exorbitant executive compensation and associated high jinks and luxurious lifestyles; a job-less, instead of job-led, growth; inequities in the sharing of the fruits of development by the haves and have-nots; structural and sectoral imbalances; and even social tensions in the form of Naxalism and the like. With the Government handing over the baton to the private sector and assuming the role of a regulator and an umpire, the onus falls increasingly on the private corporates to demonstrate that they really are justified in their claims of being abler, faster, leaner and cleaner than either the Government or the public sector. Judged from this angle, one expects them to have thought through the uses to which the funds coming their way are to be put with a due sense of social responsibility and the need to augment social capital.

Ruckus over Clause 49

In this context, several questions need to be posed as they are of cardinal importance: Have the captains of industry and business got their priorities right? Do their plans for expansion, diversification, merger, acquisition, risk management and anticipated contingencies pass the tests of viability and justifiability? Are they adequately equipped to cope with the exacting demands that their rapidly enlarging physical, financial and functional commitments will be imposing on them in terms of customer orientation, accountability, transparency, ethical norms and good governance?

Can they, in short, be trusted to turn the upswing in the bourses to the advantage of the economy?

This is just a sampler of the plenty of things about which India Inc has to put its house in order. However, looking around, one finds little evidence of any of the think tanks or various brains trusts of the industry and commerce federations taking up the above questions for a thorough examination. On the contrary, the ruckus raised by the corporates over the addition by the Securities and Exchange Board of India (SEBI) of Clause 49 to the Listing Agreement relating to listed companies is deeply troubling to the investors and the general public. The new Clause aims at toning up of corporate governance by measures such as appointment of a stipulated proportion of independent directors, streamlining and broadening the scope and functions of the audit committee, clearly laying down the obligations of the board and the management towards shareholders and ensuring compliance by means of monitoring procedures and information systems.

These not so very stringent measures are not something that the companies themselves could not have thought of put into effect immediately after liberalisation 15 years ago. Instead, quite a few of them have been advancing all manner of arguments against Clause 49 and going slow on it during all the five years since SEBI intimated these measures to them on February 21, 2001. According to a recent survey, 50 per cent household investors, regardless of income or age, are dissatisfied with the sense of accountability of company managements, and 44 per cent hold the view that they cannot rely on company auditors to prevent fraud. Only 22 per cent believe that the interests of household investors in the hands of company managements are safer today than in the past.

Among their biggest worries are price manipulation, corporate mismanagement and fraud and misconduct of brokers, and insider-tradingThe position is no different in regard to the attitude to customers. For all the Niagara of words flowing out of podiums and publications on criticality of customer orientation for success in business, the "Press 1, Press 2" charade in a dulcet voice and the enticing invitation in Web sites to "Contact Us", there has been only a marginal improvement in the real life experience of the customer in his dealings with India Inc. Indeed, just like Big Government being the antithesis of sensitive, empathic, responsive, committed public service delivery, the bigger the business, the slower its reflexes and lower its customer value, mostly because, especially in India, it is yet to make the transition from the mindset of a sellers' market to that of a buyers' market

Bring out the hidden treasure trove

Soar however high it might, not all the market capitalisation can come anywhere near the size of the parallel economy estimated at Rs 500,000 crore made up of over-invoiced imports (Rs 20,000 crore), siphoning off from public projects (Rs 60,000 crore), evasion in the housing and services sectors (Rs 300,000 crore), wasted subsidies (Rs 50,000 crore) and industrial output unreflected in the books (Rs 75,000 crore). Besides, as per the Reserve Bank of India's estimate of 1992, an amount of Rs 830,000 crore belonging to resident Indians is stashed away in foreign countries. In other words, the parallel economy accounts for nearly half of the total GDP of Rs 30,00,000 crore.

It is indubitably within the power of the entire business community represented by the various federations of industry and commerce, as a matter of patriotic duty, to have a sizeable proportion of this huge, hidden treasure trove re-routed along legitimate avenues of investment. It can, thereby, help the economy not to bank so disproportionately on trading in the bourses, manifesting itself in the obsession with the Sensex

Unless Indian firms shed their escapism and get their act together on the above lines, the bang of the bourses is likely to end in a whimper. Independent of that prospect, there is also a big stumbling block on the way that is going to make nonsense of all the other ambitious plans to bolster the economy. As in the case of the weather, everybody talks about it, but nobody has been able to do much about it. We shall see what it is in the next part of the article.

(To be concluded)

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