Talk fails to lift the Sensex

Operation Market Salvage, and the support is really on. Stock markets have suddenly become very important for the government, drawing all the attention they duly deserve.

After announcing a slew of measures on 16 September, and also allowing margin trading on 18 September, the government continued with its fervent efforts - it held a pep talk session with FIIs on 19 September, promising them of implementing more reforms.

The pep talk was undertaken to reassure the FIIs - a noble effort aimed at containing the sagging Indian stock markets. The teleconference was moderated by DSP Merrill Lynch chief Hemendra Kothari and was addressed to the FIIs based in the US, Singapore, India and the UK. Others present at the teleconference included Rakesh Mohan, advisor to the prime minister, and senior officials and intermediaries of the capital market and banks.

FII sources, speaking to domain-B on conditions of anonymity, said the finance ministers assurances included:

1) second-generation reforms to be put on the fast track and possible changes in the labour policy;
2) rise in the FII investment limit in Indian companies;
3) maintaining status quo on the double taxation avoidance treaty with Mauritius for genuine investment vehicles;
4) change in buyback regulations;
5) getting the Fiscal Responsibility Bill passed in the winter session of the Parliament;
6) No increases in taxes even if revenues are down and the fiscal situation isnt comfortable.

Finance Minister Yashwant Sinha has reasons to be concerned. Perceived to be the true barometer of the economy, the markets have slumped in the last few days largely on dumping by the FIIs in line with the general trend wordwide. The FIIs are not only concerned about the rupees fall, which erodes their portfolio value substantially, but they are also worried about the fall in stock prices in general. They are, therefore, taking a double hit. Naturally, they are selling in the hope that the markets will fall further and they will be well positioned to buy at lower levels.

What may be good for the FIIs is not necessarily great going for India. As far as India is concerned, apart from the fact that this leads to erosion of market capitalisation, this essentially also means that precious foreign exchange is going out of the country. The problem does not end here. The FIIs are known to disinvest or book profits towards the yearend and selling could aggravate in case nothing is done to restore investor confidence.

With the economy not doing too well no one can complain that the markets are heading the wrong way. Software exports are expected to take a hit post-terrorist attack in America. But this is where our worries should stop. Exports constitute only 10 per cent of our economy and to that extent we stay cushioned to what happens in the world outside. It is the domestic sector where there are areas of optimism and this is where we should concentrate on. What are these? For one, monsoons have generally lived up to expectations and the rural economy is expected to do better in the current year. This is expected to kick up demand for white goods, agricultural products and the FMCG sector among others, which may percolate to other sectors as well. Secondly, India is a growing country and there are huge areas of reforms within, which if undertaken, will go a long way to push up growth.

Therefore Sinha should ponder over the following to pep up economy:

1) Reduce the oil pool deficit, which currently stands at about Rs 13,000 crore. The deficit is largely due to subsidies on diesel, LPG and kerosene. So remove subsidies, realign crude prices with those at the international level and strengthen the countrys fiscal position.

2) Sell or disinvest PSUs in the true sense of the world. No cosmetic changes like transferring assets to some government-owned FI or to some financially strong government company.

3) Close down sick mills.

4) Reduce government expenditure. Two areas where the government expenditure is very high are wages and interest outgoings. The first can be reduced by implementing labour reforms and the second by liquidating non-performing assets and using the cash to repay debt.

5) High investment in infrastructure like power and roads. We must avoid situations like Enron. One day Yes, and the other day No.

Clearly, Indias problems are more internal than external. Endorsing the views expressed above by domain-B, Prabhudas Lilladhers senior manager (private wealth group) Vipul Shah said: In China, a distance of 3,000 kms can be covered in 24 hours, whereas in India you need at least three days to finish the feat. In this situation how can we compete?

Clearly, what Sinha and his colleagues in the government need to do is implementation. If this is done, investors definitely would like to talk to the government.

It is hardly surprising that the markets failed to respond to Sinhas teleconference assurances. And at the time of writing this article the Sensex was down by about 100 points.