U. S. attack: backlash on Indian bourses

By Oommen A Ninan

MUMBAI, SEPT. 16. The tremors following the crash of the World Trade Center towers in New York were felt globally, particularly in the financial markets. The Indian market came down by 10 per cent and it is not clear whether this is just the beginning of another fall as a sharp drop in indices was felt on the last day of trading.

The benchmark Bombay Stock Exchange sensitive index (Sensex) crashed by 368.28 points to 2830.12 from 3198.40 recorded in the previous weekend. On the National Stock Exchange (NSE), the S&P CNX Nifty dipped by 114.80 points to 921.10 from the previous Friday's close of 1035.90.

On the last day, the Sensex tumbled by more than 7 per cent before clawed back to finish at 2830.12. Foreign institutional investors (FIIs) triggered the panic button as many feared that mutual funds could face heavy redemption in the U.S. when the Wall Street reopens for business on Monday after remaining closed for four continuous days.

The economic impact of this terrible incident is going to be felt all over the world and India is no exception. At present, India is suffering from recession and the problems in the U.S. only added to its woes. In any case, a solution to India's problems has to come from within the economy since most of its products and services are yet to match global standards. In these circumstances the Finance Minister, Mr. Yashwant Sinha, has a challenging and difficult task on hand in propping up the economy. ``Pump priming of economy may not work this time as the fiscal deficit already is too large,'' said Mr. V. R. Srinivasan, a leading financial consultant. This will only increase the interest rate which is already high on a comparative basis. ``The Government needs to come out with radical ideas to get out of the mess without tinkering with the interest rate northwards and reducing the fiscal deficit,'' he added.

Expenditure control may take its own time even if it is initiated on a war-time basis. According to Mr. Srinivasan, the bloated bureaucracy which is the main cause for India's economic woes is unlikely to implement any measures in this direction.

With production already slowed down and consumption going down even further, collections from direct and indirect taxes will in no way come near the budget estimates. The crisis of confidence in the capital market has already taken its toll on the disinvestment process of the Government even though various other reasons are being attributed for the slow pace of the disinvestment programme. Thus, Mr. Sinha is left with no other option, but to wield the stick to stem the rot.

At last the Government is seeing the writing on the wall as the Prime Minister himself has accepted the poor state of the economy. The Centre should seriously consider declaring a financial emergency as the States' economy is even worse than the Centre. However, instead of talking about improving the economy, the Government should learn to implement its own proposals.

The public sector enterprises (PSEs), especially the loss making ones, need to be divested at any cost. Perhaps here, given the general economic climate both domestic and international, the PSEs which are not conducive, the Government should seriously consider giving operational ownership to the private sector with the option to assume beneficial ownership on the basis of performance parameters. Eventhough this may not result in any cash flow immediately, it would save time and resources of the Government in keeping these institutions off float. This will also facilitate right sizing the bureaucracy as it (Government) would not be requiring those departments to supervise the loss making units.

The other option the Government can consider is mopping up the gold lying with the Indian population. In the aftermath of the collapse of the World Trade Center (WTC) in New York, gold prices have stabilised at higher levels and the Government can issue gold bonds abroad which will also help the rupee from its free fall. The other area the Government should seriously concentrate is plugging the holes caused by the revenue disappearance through fraudulent means. The Indian software professionals can perhaps give a solution to attack these perennial problems. However, the initiatives should come from the government in spending more on technology upgradation and infrastructure at least in those areas where results could be felt immediately.

A better infrastructure will definitely make the manufacturing sector, which is vital for propping up the economy, more cost- effective. The hearing conducted by the Joint Parliamentary Committee (JPC) has exposed the lack of co-ordination among the various enforcement agencies such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). Eventhough there are enough caution signals, both the agencies failed to respond on time resulting in the collapse of the financial markets. It is hoped that the JPC will come out with concrete recommendations to prevent the recurrence of such events.

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