The Hindu Business Line : From K-10 to 10-K, little has changed

The Sensex crossing the historic mark of 10,000 (10-K) has elicited opinions from various quarters on the robustness of the economy. The event probably reflects the `confidence' foreign investors have in India.

Reports suggest that foreign institutional investors bought shares worth $137 million soon after the Sensex crossed the 10,000-mark, and their investments so far in 2006 have reached $1 billion.

While crossing the 10-K-mark itself is no doubt an achievement, the single-day investment by FIIs is not new, as it touched $106 million about five years back, after the market crash following the Ketan Parekh scam, which eroded the market capitalisation by a whopping Rs 1,46,000 crore.

Down memory lane

The scam involved 10 scrips (popularly called `K-10 scrips'), whose prices were taken to dizzy heights artificially, and the crash that followed left the investing community with unprecedented losses; the UTI alone suffered an erosion of about Rs 500 crore.

Even while the boast of `confidence levels' in the economy continues, and a correlation is made with the Sensex touching 10-K, a trip down memory lane from K-10 to 10-K reveals that certain hard realities have not changed in the last five years. Not more than 13 per cent of the nation's income is generated from the corporate sector. The bulk of the income is realised from the unorganised sectors and tiny business units, which do not get the attention of the policy-makers and the media, in the absence of any barometer such as the the stock exchange.

Too little stock

Of the total number of companies registered with the Registrar of Companies, hardly 1 per cent is listed on the stock markets; the rest is unlisted and their success is obviously not measured by the stock exchanges. Given this fact, when too much money chases too little stock, there is pent-up demand, and the index soars to artificial heights.

This is further fuelled by the fact that, as far as foreign funds (termed `hot money') are concerned investment decisions are made by comparative advantage eying short-term profits rather than any loyalty or long-term investment outlook based on fundamentals.

For these reasons, if India is suddenly perceived by these `short-term stock traders' as a `robust economy', the same cannot be blown out of proportion to the extent of deceiving ourselves, since, soon, this may be followed by their judgment of `lack of confidence' or `risky market', when they choose to abandon the country for other profitable venues.

Silent contributions

The truth is that in 1992-2004, while the public sector had been eroding wealth and the private sector saving marginally, the real wealth creator was the household sector, including the small and tiny unorganised segment, to the extent of Rs 4,92,000 crore — way above the much-worshipped FDI, which had contributed in these years only about Rs 11,000 crore, or about 3 per cent of GDP.

These silent contributors are generally ignored by the media, and get submerged in the new heights the market scales or the novel capital market scams.

The Budget-making ritual and its relation to Sensex movement is another myth, as any reaction of the capital market neither reflects the true long-term effect of the Budget proposals nor are the actively traded 100 scrips true representative of the economy.

Thus, the basic facts underlying the economy have remained unchanged in the last five years in the transition from K-10 to 10-K.

Assuming that the 10-K effect is something to boast of, it is equally true and fair to recognise, acknowledge and promote, in every sense, the small and household sectors and their contribution to providing savings and generating employment of the kind that the government and corporates together have not done.

RBI as regulator

In this background, the professional approach of the Reserve Bank of India as regulator needs to be complimented on two counts.

First, the RBI has put the brakes on the Government's rather unjustified zeal in allowing 74 per cent holding for the FIIs in the banking system.

Second, despite the faint attempt by proponents of capital account convertibility, the central bank has not reacted but has substantially liberalised a number of capital account transactions for business, even while placing necessary safeguards on short-term loan management and investment in real estate.

(The author is a Chennai-based advocate and chartered accountant.)

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