How good is the "Good" Indian Sensex Story? | Nilotpal Basu

Published on 01-11-2007 In Business

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How good is the "Good" Indian Sensex Story?

India has been `greeted' by the news that Mukesh Ambani has become the richest individual in the world outrunning Bill Gates, Mexican business tycoon Karlos Slim Helu and Warren Buffett of the financial sector. The sensex is continuing its blitzkrieg and that has catapulted the elder Ambani sibling to the top spot. `Shining India' is, indeed, alive and kicking. It is not Ambani alone, or, the sensex companies, but billionaires and millionaires in India are multiplying and growing before the batting of an eyelid.

Obviously, the Prime Minister is happy. Inaugurating the "Fortune Global Forum", he has observed: "The Indian story looks so good". Apparently, the breaching of the 20 K barrier by the sensex must have been very much on the back of his mind. In fact, what has been happening in the Indian share market for the last few weeks is unheard of. Between September 18, 2007 and October 16, 2007, compared to other major world share price indices, the Indian bourses have clocked a breakneck 21.59 per cent growth outstripping all other markets. To give a sense of the comparison, the most often referred NASDAQ grew by 4.23 per cent and Dow Jones a mere 0.35 per cent during the same period.

What is happening after all? Has the Indian companies done something so overwhelming that has resulted in generating such a breakneck speed of the share prices of our top corporates? Even cursory glance at the relevant figures show that it is not the case. Instead, this is primarily a FII inflow driven performance of the Indian capital market. From just 158 FIIs doing business in the Indian share markets in 1993-94, we now have in 2007-08 (till October 19) an almost ten-fold increase, to 1,112 FIIs. In terms of cumulative inflows, the story is disproportionately bigger from $ 1,638 million in 1993-94 to $ 69,596 million in 2007-08 (till October 19).

It has now been recognised that the high rates of interests in the Indian market, particularly compared to the US where a mortgage led sub prime crisis has forced the Fed to cut the interest rate, is driving foreign funds by the droves to the Indian scene. And, this creates the all-pervading euphoria – a la - `Shining India', `Resurgent India', `India Poised' and so on and so forth.

But this good-looking story is not without hiccups. In between, the FIIs had responded with alacrity, if not vengeance, on the market regulator SEBI's delayed and rather mild palliative to regulate participatory notes – a much-criticised financial instrument which has increasingly emerged as a major element in the FII inflows. In fact, the share of P-notes accounted for more than 50 per cent of the total inflows during this sensex zoom.

A major problem with P-notes is that the entities investing in these, keep their identities undisclosed and, therefore, making it impossible for the regulator to cover their audit trail. From JPC on the share market scam to the RBI and the Tarapore Committee subsequently have all recommended strong action against P-notes including their total ban because they could disguise efforts of Indian companies to sanitise black money and laundering drug funds.

The fact that FIIs could strike back to frustrate the small step to bring in transparency by the market regulator, underlines the soft underbelly of our capital market structure.

But what the huge fund flows of the FIIs have actually led to is far more serious and complex. The surfeit of dollars in the market has led to a hardening of the Indian rupee. The scale of the rupee appreciation can be gauged from the fact that RBI has lost Rs. 65,065.66 crores from its currency and gold revaluation accounts in the year 2006-07. Between end of March 2007 and September 7, the rupee has appreciated from Rs. 43.60 to a dollar to around Rs. 39, i.e., around 10 per cent.

Who is gaining and who is losing? The answer is not difficult to guess. The FIIs have a double take – when they bring in the billions, the rupee appreciates and when they buy up shares, the share prices shoot up. An expert has observed: "They use the time lag and benefit by selling the artificially high priced shares and encash for dollars at the appreciated price of the rupee." And, of course, the Indian corporates – one of whom has become the richest in the world.

Similarly, the losers are also obvious – the entire export sector. Of these is the across the board SMEs who do not profit out of the surging sensex. An expert states: "There is enough evidence on the ground to suggest that export-driven, labour intensive sectors like textiles are bleeding". The textile sector export growth has declined from 16.6 per cent in 2005-06 to just over 9 per cent. The Planning Commission has estimated that the growth in the Eleventh Plan in this sector would be 22 per cent a year. But, instead, now due to the appreciating rupee, the exports are becoming unviable with competitors, China, Pakistan, Vietnam and Cambodia relatively unaffected by such exchange rate difficulties. Interestingly, none of these countries have embraced `hot money' like we have done.

But the true impact of these cold statistics conceals the magnitude of human suffering. A recent textile industry estimate show a major drop of 1.22 lakh in incremental employment generation due to the export downturn in 2006-07. And, now this bleak picture in the textile industry is leading to projections which show adverse impact on all sub sectors of the textile industry like spinning and machinery production. And, of course, ultimately the cotton crop itself. The magnitude of the crisis can be well understood when one remembers that the textile sector involves an employment of 32 million.

Prime Minister's account of the `good Indian story' and the brouhaha over surging sensex notwithstanding, there is a large cloud of uncertainty and the spectre of unemployment looming large over labour intensive export-oriented sectors of the economy. The zone of comfort by the market overcoming the obstacle may be short lived. Vidarbha cotton growers' suicides continue. These may now grow exponentially. Can conscientious Indians afford to remain complacent?

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