Living in Denial (MoneyLIFE Issue, 18th Dec 08 - Different Strokes)
December 3, 2008
Denials have been used as a political strategy
It was May 1992, a few weeks after I broke what came to be known as the Harshad Mehta scam. The scam was actually a creation of fake securities (bankers’ receipts and units of Unit Trust of India) by almost the entire banking sector. My report put the securities scam at around Rs5,000 crore (a stupendous figure 16 years ago) and was front-paged by India’s leading newspaper.
That very afternoon, S Venkitaramanan, then governor of the Reserve Bank of India (RBI), called an urgent press conference to deny the report. The media dutifully reported his claim, although it was not backed by evidence. It is the only time I know, in my 25 years in journalism, when the RBI governor has called a press conference to deny a news report. The scam amount was proved to be over Rs5,000 crore and some estimates even placed it at as high as Rs25,000 crore depending on who was crunching the numbers. Dr Manmohan Singh was then the finance minister and
P Chidambaram the commerce minister.
Why is this relevant today? Not only is the same duo in charge, but even the smallest suggestion of lax regulation is being dismissed with similar denials. Anonymous finance ministry sources leak reports that the extent of short-selling by foreign institutional investors (FIIs) is too insignificant to have impacted stock prices. This is followed by a similar iteration by the capital market regulator. The numbers and claims that back such statements are not open to questioning nor is all the data pertaining to institutional activity available in the public domain. Without that, statistics can always be twisted and presented to suit one’s conclusions.
In the same vein, we are told that 90% of assets in fixed maturity plans (FMPs) were in AAA-rated securities. Undoubtedly they were. But the world has realised that this high rating is meaningless when finance companies are strapped for cash; real estate is not selling; and, on an average, stock prices of these companies are down 90% from their peak (some have dipped by as much as 97%). The rating agencies were a little slow to react, but all their press releases these days are about downgrades. That is why smart investors quickly withdrew their investments from FMPs causing a liquidity crisis in the fund industry and led SEBI to consider withdrawing the redemption option. Government denials question the credibility of industry associations and those who enjoy a high reputation. What does the financial sector have to say? A mutual fund chief told me: “I am very disappointed with what is going on. Nobody wants to initiate any tough action.” A top banker said: “They must be under some pressure,” while the head honcho of a large finance company said: “One can only draw attention to facts; we are not surprised at the statements.” They point out that the regulator, until September, had even refused to believe that FIIs could be hiding behind non-transparent investments like participatory notes to short-sell Indian stocks, although the media had reported it regularly.
What is the logic behind these denials? The Congress-led UPA (United Progressive Alliance) is heading into a general election and four state elections in the coming months. It inherited an economy in good shape and enjoyed a five-year bull run, which allowed it to ride high without initiating any significant reforms because it was constrained by coalition politics. Even the financial crisis can be explained away. After all, we are witnessing a global financial crisis and capitalism itself is under attack. The government can insist that the Indian financial system is flawlessly regulated and we are only suffering collateral damage due to international excesses.
It is a nice line and one that will work so long as the opposition parties are in disarray and unable to drum up a cogent counter-argument. Clearly, every politician is worried that criticism of business will affect their election funding. In any case, the tax-paying middle class, which is losing jobs and seeing their savings erode, has always been irrelevant for vote gathering.