Memory Recall: Sensex Climbed Kargil Heights

Updated: May 24 2002, 05:30am hrs
What will it take to arrest this weeks slide down the slopes of the BSE sensex Memory recall and a reality check on the state of the economy. But then, someone in the government must speak up, must re-assure nervous investors, must give out the numbers about affordability of a war, the underlying strengths of the economy. Hello! Anyone there!

For an entire week, the sensex has been slipping nervously, and there is stunning silence from the official managers of the economy. Forget government spokesmen. Just go to www.financialexpress.com and read through our easy to access archives from May 3, 1999 when some shepherds spotted Pakistani troops on Jubbar Heights in the Kargil region of Jammu and Kashmir - till July 4, 1999 when Indian troops captured Tiger Hill and Pakistan Prime Minister Nawaz Sharif met United States President Bill Clinton in Washington DC. Look at how the markets behaved and how the economy responded.

Consider the now jittery BSE sensex. It did dip down a total of about 200 points between May 26th and May 27th day one and two of Operation Vijay, but it soon recovered and The Financial Express reported on the 28th of May that despite the intra-day decline, the undertone of the market continued to remain bullish. This was a day before finance minister Yashwant Sinha spoke out. Addressing the Forum of Financial Writers on 29th May, Mr Sinha said reassuringly The economy will not be affected by Kargil. His words may have carried more weight then than may be the case now, still why the silence now

Bullish the market was, right through May, June and July and through much of that year, notwithstanding Kargil, not fearing the nuclear fears, not bothered by the uncertainty of a military conflict in the middle of a general election. On 25th May, the day before the first Indian air attack along the LoC, the BSE sensex was at 4028, having climbed to that point from around 3300 after the union budget of February 1999. On May 28th, 1999, the sensex was down at 3912, but by 1st June it was back at 4042.

Through the entire month of June 1999, as Indian soldiers clawed their way back up the Kargil heights, inch by inch, heartbeat by heartbeat, the sensex kept company with the morale of the soldier and inched its way up to 4051 on 11th June, 4214 on 22nd June and crossing 4500 on 1st July, when the Indian army regained Point 4700 and three other nearby peaks!

That was a bull phase. According to BSE, market capitalisation increased by 65 per cent that year from Rs 488,229 crore in April 1999 to Rs 803,353 crore in December 1999, while according to NSE it increased by 92 per cent from Rs 445,380 crore to Rs 852,985 crore for the same period. Much of this was driven by domestic investors since foreign institutional investors were in and out that year, though their net contribution was positive, as it remains at this time. To be sure, in June 1999, FIIs did turn bearish, bringing in a mere $ 20.8 million (equity and debt flows) compared to $ 405 million in May 1999 and $ 348.6 million in July 1999. The upward climb of the sensex in the Kargil month of June 1999 was, therefore, fuelled largely by domestic investors.

So how come investors have turned so bearish now, and that too when the Indian armed forces morale is so high. Talk to a soldier or an officer in uniform and their optimism is palpable. Surely some of it must rub off on investors Forget sentiment and morale, the fundamentals are on the mend too. Economic activity is picking up and the core sector reported a 5.9 per cent growth in April 2002.

More to the point, between December 2001, when the Indian Parliament was attacked and the entire Indian army was mobilised, and April 2002, the net inflow of foreign direct investment into India went up a whopping 44 per cent and Indias foreign exchange reserves went up from around $ 48 billion to over $55 billion! So whos afraid of the border tension So how come market capitalisation on the bourse has been shaved off so much this past week

The nervousness of investors is understandable. When the market is gripped by such nervousness, it is upto the analysts, the financial media and, above all, the official managers of the economy to calm the nerves and give out facts. No one will believe empty optimism, so do not waste time fudging facts or talking the market up. There is no need for any talking up or talking down, just talk facts. The facts are not new, they offer a mixed picture. And to that large cloud of low industrial growth and high fiscal deficits, there is now the silver lining of another normal monsoon, El Nino willing.

Look at the macroeconomics of Kargil 1999. In 1999-2000, real gross domestic product grew at 6.1 per cent, which is marginally above the long-term annual average growth rate for the period 1980-2002. It is in fact in 2000-01 that GDP growth slipped to a lowly 4 per cent. War can have that kind of an effect on growth! External trade did well in 1999-2000, with exports growing at 9.5 per cent and imports at 16.5 per cent. The current account deficit was a respectable -1.1 per cent of GDP and forex reserves were a robust $ 38 bn, up from the previous years $ 32 bn.

All in all, Kargil did not harm the economy. It was political mismanagement the year after that may well have snafued the economy, but Kargil certainly did not.

So why dont investors remember this There is an element of learning by living through effect on investors and it is entirely possible that a good majority of the investors are so unhappy with the present governments lacklustre performance on so many fronts in the past one year that they have completely forgotten, discounted or factored out this positive record of governance of 1999 and only retain the memory of their more recent incompetence.

In the modern world a battle is waged on many fronts. Soldiers on the border are the most ancient instrument of war. The media and the markets are as important a battlefront as the mountains. The armed forces are doing their job on one front, whos minding the store on other fronts Koi hai!