The Hindu Business Line : Beware the backlash

ECONOMIST Paul Krugman warned recently that free trade liberals have to fear a likely backlash from American labour. Faced with further cuts in the already stagnant hourly wage-rates, under competitive pressure, and seeing the executives continuing to get plum rewards, they could ask `why not cut foreign competition instead?'

I have always wondered about a similar scenario of reactions from India's organised labour and the politician. The leadership of all political parties has by now mastered the art of double-speak on liberal competition policies, addressed to different audiences: In favour of foreign investment, trade liberalisation, de-regulated open markets on the one side, and protecting the vote banks, on the other. Seldom does the rhetoric supporting one objective sit well with the other. Thus, we have to produce a competition policy without a clear exit policy for sick units or a safety net for labour. We are obliged to wave a magic wand of the world's most attractive market in front of the overseas investor, simultaneously hedging liberalisation with contradictory, constraining clauses. This dilemma has been compounded in the present Government by the presence of avowed Communists in the coalition. At the moment of course, it is India Week on BBC, India season for British Airways and party-time for the institutional investor who brought in his dollars even six months ago. The markets have feasted on 40-100 per cent annualised returns on relatively robust, low-risk equity portfolios, something the Western fund manager normally would not dare fantasise about. The question is: Can this last? Of course, the current wisdom is that barring what are termed as corrections, which simply means large volume punters exiting high to re-enter low, the general growth trend will continue into the foreseeable future.

The point, however, is that many small, amateur players, who have never before had such a high proportion of their savings in stocks, have now entered this market. They have neither the savvy nor the information to play where the big boys play, nor indeed their mental resilience to withstand, say, a 25 per cent drop in the value of their holdings, something they did not have to worry about when putting all his money in fixed deposits or bank deposits.

Yet, such reversals can easily happen due to factors entirely external to the Indian economy such as international fuel prices or political developments in Europe, the US, or West Asia. Typically, the small retail investor tends to be led by the nose by one of two forces: The young suited experts on TV, or the friendly neighbourhood broker and fellow investor, who is betting essentially on which way the others, such as the FIIs, will bet. The recent stories of bizarre movements in penny stocks only reinforce this worry. Herein lies the enormous responsibility placed on the shoulders of disinterested media-owners and financial journalists to educate the investor. If this is not done, bureaucracy and the conservative Indian mind will all too readily hit the brakes on all market-friendly economic policies.

S. Ramachander

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