Ignore the little coyness in the budget week, the Sensex is zooming. The kings are no longer around, never mind, constituents of the affluent middle class, gleams in their eyes, are busy in the counting-houses counting their money. In the on-going excitement, few stop to take cognizance of the fact that the stock exchanges cannot, and do not, create any real assets or wealth. All they do is create the illusion of the accretion of wealth. What actually takes place is a re-distribution of assets between the buyers and the sellers of stock. True, as share-prices keep fluctuating, those experiencing an appreciation in the prices of the shares they hold enjoy a feeling of betterment. Those whose stocks decline in prices feel worse off. When share changes hands, some buy cheap, sell dear and make a killing, while those who are forced to sell cheap are left woebegone. In the process, a redistribution of wealth eventuates — some become rich and richer, some others face rack and ruin. These transactions in the share markets, however, have, by and large, no relationship with unfolding real productive activities in agriculture, industry and the services.
The last statement perhaps deserves an amendment. An increase, for instance, in industrial prosperity and, along with it, industrial profits leads to an increase in the share-price of the profit-making firms in case these are listed in the stock exchanges. As a result, the attractiveness of their shares grows. Householders may then choose to divert their savings from elsewhere to buy such shares. Similarly, if the rate of profit registered by a firm drops, its shares come under pressure. And if there is a general dip in industrial profitability, share-prices, in general, turn dull and householders begin to turn their faces away from the stock exchanges. The opposite happens in times of industrial growth.
An awkwardness creeps in here. If it is boom time, and share-prices are rising boisterously, householders will rather buy shares of firms listed in the bourses than invest in the purchase of shares of a newly floated venture. Should this trend persist, a negative correlation would get established between share market exuberance and new industrial growth: a flourishing share market will suck in savings, which could otherwise have been deployed for fresh capital formation.
But most of the ruminations above are rendered irrelevant once the economy is exposed to the buffetings of international capital movements. Consider the case of a poor country, which is suffering from persistent balance-of-payments constraints. It decides to open up its system, as India has done since 1991. In the aftermath, short-term capital starts visiting its shores. Institutional investors controlling such capital — collectively representing international finance capital — opt for the local stock exchanges as their favourite packing ground. The usually-expected relationship between trends in the share markets and in the productive sectors, as a result, undergoes a transformation. A buoyancy in industrial output need no longer necessarily lead to a buoyancy in the share markets. International investors have a large presence in the bourses; should they choose to play bear, share prices could remain depressed despite burgeoning industrial activity. On the other hand, even if domestic industries are in the doldrums, share-prices could still be on a roll, thanks to the bullishness injected into the stock exchanges by foreign investors. It all depends on the magnitude of the inflowing foreign funds and the size of turnover in stock exchange transactions compared to the magnitude of gross domestic product.
What takes place in the bourses is relatively simple to follow. Foreign speculators, beginning in a small way, gradually enlarge their operations. In the course of time, they come to corner a strategic proportion of the stocks of important industrial groups. And not just of industrial groups; they grab a significant number of shares of even service entities, including banks. If the government prefers not to intervene, or has lost the capability to do so, the entire economic system might then become putty in the hands of foreigners. So much so that on some propitious morning, they might walk over to the bourses, briskly unload a substantial part of their holdings of important companies, and thereby perilously bring down share-prices across-the-board. Panic might set in, small domestic investors might join the scramble to unload shares. The resulting chaos could have a devastating impact on the economy. As foreign investors withdraw their funds, the country’s foreign exchange assets begin to dwindle at a very fast pace. The domestic industrial sector as well as the till-now-accelerating service activities would feel the pinch. Something of this nature did indeed occur in some of the East Asian countries during 1997-98.
Are we sure that we are immune to the danger of being visited by the same phenomenon' Not really. Our foreign balances have been rising in recent years and currently touch the level of around $175 billion. A large proportion of this money that has come in stalks our share markets. We still do not know what quantity of these foreign funds is actively engaged in speculative operations in the bourses. We do not know whether foreign institutional investors, acting as a block, have already acquired a major proportion of the stocks of many leading corporate bodies. For that matter, we do not even know whether a substantial chunk of the total equity of our commercial banks, including that of the State Bank of India, has not meanwhile been picked by foreigners from the share market.
Actually, one does not even need to own a majority of its equity to control a corporate body or a bank: even a holding to the extent of 20 to 30 per cent of the total equity could be enough in case the ownership of the other shares is widely dispersed. The share market can therefore be weaponry in the hands of foreigners. They command the bourses, and could rule the economy. By a sudden withdrawal of funds, they are in a position to create a crisis in the balance of payments too.
Much of this provides a clue to why an integral element of the structural adjustment programme the International Monetary Fund and the World Bank recommended for countries facing economic difficulties incorporates a directive for developing, on the basis of priority, a modern stock exchange system. The share market apparatus sets up an easy way out for international finance capital to acquire control over the processes of the economy. Outwardly the picture remains serene, the nominal rulers of the country congratulate themselves on the comfortable state of foreign exchange holdings and the buoyancy in the share market even though most other macro-economic indices, including the rate of growth in the farm sector or overall employment, are discouraging. This illusion of well-being provides the cover for external parties to occupy strategic positions in every nook and corner of the economy and hold it to ransom.
The Sensex is zooming, the affluent sections, with no capital gains tax to bear, are happy, the finance minister is beaming, but the last laugh remains the prerogative of FIIs acting on behalf of international finance capital. Their’s is the kingdom at the end of the day. The Find-Bank philosophy is an open book for everybody to study and learn from: in their view, countries are collectively most secure if the control of productive assets is in the hands of those who can manage them best. Once you accept this doctrine, you should have no qualms about handing over the economy to the predators in the stock exchanges representing international finance capital.