Calming Market Panic

Updated: May 31 2004, 05:30am hrs
On Friday, the BSE Sensex fell 233 points, ostensibly because the Common Minimum Programme (CMP) of the Congress-led government said that it planned to review the Electricity Act and the notorious, much-misused double taxation treaty with Mauritius. Immediately, the government felt obliged to reassure the capital market and the finance minister made a public statement to explain its CMP. He also announced a visit to Mumbai to meet the capital market regulator as well as business and industry. How often can the government hope to reassure markets or talk up falling prices That the capital market has great confidence in the Prime Minister and the finance minister is evident from its rapturous response to their respective appointments. But any new government brings with it an inevitable degree of uncertainly, especially when it comprises a discordant set of coalition partners. The government must look at stock price movements in perspective and not allow the Sensex to become a daily referendum on its performance. Although the National Democratic Alliance marched to the polls to the tune of a soaring Sensex, a closer look presents a different picture. Exactly a year ago, the Sensex was at its 52-week low of 3158. Just over a year before the election results were announced, it was at a pathetic 2980. Much of the Sensexs shine was acquired only over the last 12 months, that too because of massive foreign institutional investment in India. Before that, the Ketan Parekh-led bull run had ended in a great big scam destroying investor confidence and causing enormous losses to investors.

Instead of worrying about the swings of the Sensex, the government must only ensure that prices are not manipulated and focus its attention on delivering results. Investors are savvy enough to realise that the NDAs disinvestment programme was also extremely controversial and the privatisation of telecom, shipping and oil companies was always doubtful. Much of the buoyancy in public sector share prices in March and April had been entirely built on the hope and assumption that the NDA, with a larger majority, would be able to get approval for the privatisation of oil companies from Parliament. Similarly, investors are also aware that the CMP is a motherhood statement and not specific policy. Business and investors judge governments by their actions and initiatives and not on vague promises. Having said that, stock prices remain significantly higher than they were at the beginning of the bull run last year and investors are bound to cash their profits until this government finds its feet. Instead of worrying too much about the short-term movement of stock prices, the government must focus on delivering results. The current instability will then be forgotten as quickly as the Ketan Parekh scam was wiped out from investors memory.