The Hindu Business Line : The stock market mayhem

Surfing business channels on TV these days brings one face to face with how hard the stock market crash has hit investors — big and small. Gone is the swagger, the bravado, the nonchalance that characterised the gait of the biggies — the Ambanis, the Birlas, the K. P. Singhs, the Tatas. There is instead a sombre look over the sharp dip in their fortunes and a fear of what may lie ahead.

At another level, there is the army of small and medium investors, many of whom had put their life’s savings into shares and mutual funds and are today in a state of panic.

It is all very well for the Finance Minister, Mr P. Chidambaram, to counsel that people should stop looking at the stock market index from day to day, but mention this to an affected investor and he sees the statement as a cruel joke on those of his ilk.

Markets follow no logic

Yet, all seemed hunky dory only a few months ago. On these very channels, seeing the Bombay Stock Exchange index cross the 20,000-mark in January this year, some market analysts were speculating when it would cross the 40,000-mark.

What it shows is, either, as many have been claiming for long, Indian markets follow no logic, or that our market analysts — many of them at any rate — rely more on half-baked surmises than on a scientific data-based study.

For months, until January 21, 2008, the stock market had defied gravity as other regional markets suffered shocks. India became a favoured destination when the US Federal Reserve cut interest rates by 50 basis points to avert recession and released liquidity into the system on September 19, 2007. Much of that money found its way into booming economies like India.

Discarding market fundamentals, too many people bought dubious shares recommended by poorly informed sub-brokers or acted on ‘tips’ given by those who pretended to know it all.

When disaster struck

But then, like many other countries, disaster struck Indian markets. The Sensex crashed by 1,408 points, the biggest one-day drop in the 133-year history of the BSE. Over $151 billion of investor wealth was wiped out in a single day. The market cap of all the companies traded on BSE evaporated by a staggering $940 billion during the period from January 8 and October 24. At peak valuation when the Sensex crossed 21,000, total market capitalisation was over $1.58 trillion. This fell to less than half.

Given the importance of foreign institutional investment (FII) in driving Indian stock markets and the fact that cumulative investments by FIIs stood at $66.5 billion at the beginning of this calendar year, the pullout of over $12 billion by them in the first 10 months has contributed greatly in triggering a collapse in stock prices. In addition, this withdrawal by the FIIs led to a sharp depreciation of the rupee. Between January 1 and October 16, the RBI reference rate for the rupee fell by nearly 25 per cent, from Rs 39.20 to the dollar to Rs 48.86. This was despite the sale of dollars by the RBI, which was reflected in a decline of $25.8 billion in its foreign currency assets between the end of March and October 3. Now, the rupee is hovering around 50 to a dollar.

Fallout of market crash

The biggest fall in wealth among promoters of top business houses in the country has been that of the Ambani brothers. Though still topping the market cap ranking, Reliance Industries’ Chairman, Mr Mukesh Ambani, saw his personal wealth crash from $57.6 billion as on January 8 to $14.4 billion on October 24, 2008 — a fall of 75 per cent. Mr Anil Ambani saw his wealth tumble from $48.4 billion to $8.4 billion — a loss of 83 per cent.

Realty major, DLF, was the third biggest loser where the promoter wealth eroded from $44 billion to as low as $6 billion. DLF was followed by Tatas who saw their wealth in 27 listed companies plunge from $38.2 billion to $12.8 billion, a loss of 67 per cent.

An incidental fallout of the stock market crash has been its psychological impact on young people. With salary levels having gone up sharply in recent years, especially in the sunrise industries, young executives had taken to the stock markets in a big way. Many of them are now ruing why they did not go for safer options. Consequently, bank fixed deposits and national savings certificates are in demand from newly-converted now risk-averse youngsters.

The US business magazine Forbes, in its annual report on the world’s billionaires released in March last, estimated the wealth amassed by Indian billionaires at $340.9 billion or Rs 64,000 crore, which is nearly 31 per cent of the country’s total GDP size. The net worth of all the Chinese billionaires was estimated to be just about three per cent of the country’s GDP, while that for the US billionaires nearly 11 per cent.

The Forbes report said Indians accounted for nearly eight per cent of the world’s total billionaire wealth. This was nearly four times of that held by Chinese, but less than one-fourth of about 36 per cent owned by the Americans. Besides, the Indians’ wealth had soared nearly 78 per cent from last year’s total of $191 billion.

India also had the largest number of four billionaires in top ten — NRI steel baron, Lakshmi Mittal (4th), Mukesh Ambani (5th), Anil Ambani (6th) and K. P. Singh (8th). There were two Americans — Warren Buffet at the top and Bill Gates at third — and one each from Mexico, Sweden, Russia and Germany.

Trail of destruction

Predictably, the market slowdown will leave a trail of destruction. The major players have the financial muscle to weather the storm and bounce back substantially as market conditions improve. But it is the small investor who has little savings other than his shares to bank upon, which he will be forced to sell in bad times.

An inevitable consequence of the economic slowdown has been the growing ranks of the unemployed. It is quite on the cards that disparities, which are already acute in this country, will further increase. That this will exacerbate social tensions should set alarm bells ringing. It is not enough to have billionaires multiplying. The index of public welfare is going down and will slide further. One shudders to think of the consequences.

The stock market crash has indeed dampened spirits in India but the Centre remains non-chalant. With general elections due in a few months, there is heightened interest in whether the market will pick up by then and, if not, what effect it would have on the Indian electorate. We need to wait and watch.

(The author is former editor (Tamil Nadu), The New Indian Express, Chennai. blfeedback@thehindu.co.in)

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