How did the capital market react to the possibility of a non-NDA government? Will the mayhem in the markets continue? What happens to reforms? Sucheta Dalal reports.
Bloodbath on Dalal Street
All it takes is some ill-considered statements to give the capital market a huge fright. The relief rally on Thursday, after a stable government at the center seemed a certainty, gave way to a blood bath on Friday. The steep fall in stock indices – a stunning350 points in the BSE Sensex and approximately 145 points in the NIFTY at 3.25 p.m. that day – doesn’t even begin to portray the utter fright and confusion among investors. Institutional investors, especially the foreigners seemed to let their actions do the talking and were big sellers. Hedge funds and those investing through Participatory Notes were the fastest to dump stocks. Most of the mayhem on Friday is attributed to rigid statements by the left party leaders, indicating complete opposition to the disinvestment of Public Sector Undertakings (PSUs). At least two party ideologues spoke about winding up the Disinvestment Ministry itself. The Samajwadi Party also made noises about opposing disinvestment; at least in the manner in which it was done by the BJP-led government. No wonder then, that public sector shares led the crash and the PSU stock index collapsed over 14 per cent leading to a domino effect in other sectors as well. Why has the disinvestment process become a barometer for the future of reforms? For one, because public sector banks and companies led much of the rally during the last months of the BJP government. Foreign Institutional investors (FIIs) were big buyers of PSU shares, especially companies such as ONGC, Dredging Corporation, Gas Authority of India (GAIL), Power Trading Corporation, IPCL and Petronet that were divested in March. Since every poll pundit and psephologist predicted a return of the National Democratic Alliance, FIIs and other investors remained bullish about PSUs and remained fully invested in the run up to the elections. Disinvestment Minister Arun Shourie’s promise to raise Rs 100,000 crore from the primary capital market in the next fiscal year, further encouraged such bullishness, especially among small investors. The vehemence of the communist parties’ opposition to disinvestment, as reflected in their televised comments, is forcing a swift re-evaluation of investment decisions and investors’ complacency about the reform process continuing. The fact that the NDA government sold at least six PSU stocks at the peak of the bull run, means that investors have bought high and stand to lose a lot if further disinvestment is scuttled. That too has exacerbated the selling pressure. All this could change if the committee led by Dr.Manmohan Singh works out a common minimum programme along with the Congress’s political partners, which hammers out a clear consensus on reforms. But now it seems inevitable that investors will remain wary and nervous until they see real action on the reform front, rather than mere pronouncements of intention. FIIs who have invested nearly US $ seven billion in the market in the last year alone will be the key; they are clearly pulling out of the capital market while they watch developments with trepidation.