Sucheta Dalal :Investor nervousness likely to continue
Sucheta Dalal

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Investor nervousness likely to continue  

May 3, 2004

The markets are not going to stop being nervous in a hurry, in fact uncertainty could even continue until the Union Budget.

Investor nervousness likely to continue

By Sucheta Dalal

The capital market is in turmoil, industrialists are worried and the media is in a tizzy. The benchmark BSE Sensex has dropped nearly 300 points and investors are struggling to predict the future based on polls and predictions trotted out by television channels. In one stroke, the exit polls have ended the facile assumption that economic reforms would continue unhampered, no matter which party formed a government.

Before the elections, it was simply believed that the BJP and its allies would be back in power. Failing that, the Congress would lead the formation of the next government. We were told that India has clearly moved to a two party system. It now emerges from the exit polls (with all their fallibility), that neither the Congress-led alliance nor the NDA will find it easy to cross the halfway mark in the Lok Sabha.

Especially since the NDA’s allies — the Telugu Desam Party and the AIDMK are unlikely to shine in their respective states. In that case, real political power will devolve on a rag-tag bunch of backward looking politicians, or the communist party. Television visuals of Samajwadi Party chief, Mulayam Singh Yadav hopping around trying to cobble together a third front to form government are enough to send investors rushing off to dump stocks and book profits. Let’s look at the situation from the investors’ perspective.

The bull run that gave the BJP’s campaign much of its shine, started only in May 2003. This was caused by lower interest rates, control over inflation and an incredible turnaround in the manufacturing sector and the expectation of continued reforms.

Suddenly, Indian business and investors are being forced to take a closer look at the election manifestoes of the Samajwadi Party (SP), the Rashtriya Janata Dal (RJD) and the communists. What they see frightens them. The Bahujan Samaj Party (BSP) is even worse. It released its first ever manifesto this year, but focuses mainly on dalit upliftment.

Reacting to the last week’s crash in stock prices the Congress Party informed people that it has four reformist finance ministers in its stable. It also has a fairly reformist manifesto and has been staking claim to having initiated reforms. It has also begun to parade senior economists in television debates. But then, the Congress has no chance of forming government without outside support. And businessmen know that its policies will be dictated by the compulsions of having to manage a shaky coalition.

It is also apparent that nobody’s opinion matters in the Congress Party, except that of its sphinx-like president and maybe her family. How much does anybody knows about Sonia Gandhi, or her views on political and economic policy, social issues or national defence?

After all, it is one thing to read prepared speeches attacking the ruling party at election rallies and quite another to manage a bunch of self-serving politicians. The SP may play a decisive role in forming the next government. But the less said about its flip-flop on reforms the better. Mulayam Singh’s swearing-in ceremony had India’s leading industrialists and film stars in attendance. He later announced a mega development plan when he again paraded the who’s who of Indian business on a single platform. But when it came to writing its manifesto, India Inc. was obviously not asked to help.

So, while friend Amitabh Bachchan is helping to revive the fortunes of ABCL Ltd by endorsing everything from pens, paints, cars and clothes to Hajmola, the SP will discourage consumerism. It will ban luxury and fancy goods and discourage their production. It will reverse disinvestment of public sector undertakings, extend reservations, follow brazen appeasement policies for Muslims (which even embarrassed the Muslims) and so on. But its regressive manifesto may be jettisoned even before the state goes to polls.

The party told a television channel that the manifesto was prepared in a hurry and a new one would be written after the elections. What it probably reflects is the realisation that it needs business support to finance the horse-trading that usually follows a fractured mandate. At least the CPM’s views on reform and liberalisation are predictable and it promises to reverse many of the changes that have taken place in the last decade. It also reconfirms that the collapse of communism across the world hasn’t made the slightest difference to its thinking. RJD is predictably focussed on agricultural and opposed to privatisation. The good news is that most of these parties will wield only limited influence, and most of them can be easily be ‘‘persuaded’’ by friendly industrialists.

So what can one expect at the capital market over the next few weeks? If the exit polls do another flip after the last round of voting and favour the ruling BJP led alliance then markets will stabilise and look up. If the uncertainty continues, then a clear picture will emerge only on May 13, when the results are announced. If the results confirm a fractured mandate, then we may be headed for serious short-term trouble.

Foreign investors who drove the recent bull run are already showing signs of nervousness and heading towards the exit. For the first time last week, FII, who have invested nearly $7 billion since April last year were large net sellers in the cash market while the futures market signalled a further decline.

Market sources say that hedge funds are probably the first to pull out. Mutual funds were almost fully invested when the country went to the polls. If they face redemption pressure from investors, who want to cash their profits, they may be forced to sell shares and create liquidity. If the secondary market is in turmoil, the primary market is likely to be affected too and it could hit the plans of several companies planning to raise public funds.

If NDA is unable to cobble together a government after May 13, then it is safe to assume that the capital market will continue to remain turbulent until the Union Budget. Since the incoming government will have to present the budget very quickly, it will be the first significant signal of the new government’s economic policy and growth plans.

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-- Sucheta Dalal