The Telegraph
Since 1st March, 1999
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- The monsoon and foreign investors hold the Indian economy in thrall

Smugness overwhelms. The Reserve Bank of India, bathed in self-importance, has raised its estimate of the rate of growth in gross domestic product in the current year. Reason: the state of the monsoon, now performing better than earlier assumed. The RBI need not have bothered, even a boy or a girl at the primary level, just initiated in arithmetic, could have done a similar revision in the GDP estimates. The accolade for the RBI is nonetheless deafening: it is as if any day the president would announce a special Bharat Ratna for the RBI governor for doing such a good turn to the nation.

There is fierce competition even in the race for naiveté. After being in the doldrums for quite some while, the sensitive index is suddenly behaving in a manner which suggests a tiger has been put in its tank; it has crossed 4,300 and might soon leap beyond 5,000. The India Incorporated circuit are exhibiting a Pavlovian response; given the evidence of the sensex, they too are sanguine, there is no stopping Indian economic growth.

The logic is simple, market sentiments reflect the psychology of entrepreneurs as well as of buyers; the spurt in the share market heralds the strengthening of the forces of both supply and demand, the economy is consequently bound to move forward.

But dozens and dozens of instances can be quoted from 20th century British and American economic history where buoyancy in the share market did not lead to buoyancy in economic activities; the actual development was precisely to the contrary, production of goods and services turned sluggish, investment was lowly, and economic recovery was a will-o’-the-wisp.

The explanation for the seeming puzzle was simple. As share prices picked up, entrepreneurs, who were going through a dull phase, decided to cross over to investing in the stock exchanges rather than engaging in new investments; householders with money to spare also preferred to speculate in the share market rather than go for greater purchase of consumables. History bears witness to a similar relationship in the reverse direction as well: when bears take charge of the stock exchanges, speculators burn their fingers; scared by such a development, investors, reluctantly or otherwise, engage in investing in new economic activities and thus contribute to GDP growth.

India Incorporated, like the government in New Delhi, have been incompetent prognosticators in recent times: their post-liberalization bragging of a major breakthrough in the economy has been repeatedly belied. They are in danger of being proved wrong once again. The latest cheery news from the bourses may actually divert funds away from new investment into share speculation, causing a further setback to industrial production. Whimsical weather could then combine with the zigzaggedness of investment intentions and hold back the nation’s economic prosperity.

Yet another phenomenon is worth probing. In the course of the past half a dozen years, the major stock exchanges in the country have been by and large taken over by foreign institutional investors. Close to $ 40 billion have freshly entered the Indian system during these years; the overwhelming part of this flow has not added to domestic capital formation, and, instead, travelled to the share markets. Ground exists for inferring that it is these foreign funds which have smothered the stock exchanges in a great bear hug, and kept share prices depressed, since the late Nineties. The foreign investors have by now purchased a sufficiently large number of shares of Indian companies at rock bottom prices. This has been however only the first half of the total operation they have in mind. To complete their design, they will perhaps henceforth use their clout to engineer a bull run in the stock exchanges.

The securities and exchange board of India is no match for the resourcefulness of FIIs. The latter therefore will have their way and could, over the next few months, try to inject a fervour in the market; share prices might soar and soar. Once the FIIs reach the judgment that enough was enough, they might then begin unloading. They will thereby make a killing, the profits they reap could amount to several billion dollars. The investors from overseas might simultaneously decide that these profits deserved to be repatriated while the going was good and free convertibility was still available for short-term fund. In such an eventuality, India could well be the scene of a re-run of the 1997-98 debacle which overtook South Korea, Taiwan, Hong Kong, Thailand and Indonesia.

The half-empty versus half-full bottle joke about the distinguishing mark separating a pessimist from an optimist is a cliché, but a pessimist is at least right 50 per cent of the times according to the statistical theory on normal probability distribution. The facts are in any case uncomfortable. We have gradually played ourselves into an impossible corner in economic matters, from which we can be extricated only with the intermediation of external forces.

Two such forces are predominant. First, although farming activities contribute barely a quarter of our total domestic product, agriculture still provides the sustenance for more than three-fifths of the Indian population. As a result, the national economy, despite the so-called five-year plans and despite the more recent free market genuflections, continues to be a gamble on the monsoon. In the second place, in the industrial, including manufacturing sector, expectations as well as performance remain heavily dependent on the exogenously determined factor of availability of foreign funds. Direct foreign investment does not enter, or registers only a perfunc- tory presence; Indian industrial prodution therefore lags behind. The share market, captured by foreign finance, too plays the dance of the marionette.

Foreigners connive, the shares fall; foreigners inject vigour, the shares take off toward the direction of Mars. The only difference differentiating the past from the rude present is that, in the past, we had only one Almighty, the rain god, determining our destiny; now there are two of them, the rain god and the investing deities arriving from foreign lands.

That the India Incorporated circus is really Impotence Incorporated is revealed by the data recently released by official quarters on total investment that took place in the country’s industrial sector in 2002-03. Domestic investment in all the sectors taken together is less than Rs 10,000 crore. Since the GDP is currently hovering around one million crore, not even one per cent of the GDP is being set aside for industrial capital formation.

This by all accounts is an extraordinary situation. India, it would appear, is in danger of being reduced to the status of a dependant economy, such as Brazil once was — a huge economic apparatus whose engine of growth is positioned outside the system. And while Brazil over a long period was dependent upon only North American investors, we are subjugated to the moodiness of the monsoon, and have combined this with a systemic bondage relationship with foreign investors: till as long as direct foreign investment does not come, India will not grow till as long as foreign investors are in control of India’s share markets — these will be prone to grotesque volatility, again holding back economic growth. All that apart, till as long as Indian agriculture is not liberated from the vagaries of the monsoon, the country will continue to languish.

Unless of course, anarchy altogether changes the script. Organized anarchy, or anarchy which subsequently learns how to organize itself, gets known as revolution. Anarchy which shies away from revolution gets described as progressive degeneracy. In a climate dominated by degeneracy, it is dog day afternoon, the likes of Praveen Togadia, Nitin Parikh and Pappu Yadav wielding the stick.

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