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Business Commentary/Dilip Thakore

Foreign investors salivate over consensus on economic liberalism

A remarkable feature of the contemporary Indian economy in the pre-Kargil phase was the consistent rise of equity values in the nation's stock exchanges and in the pace-setting Bombay Stock Exchange in particular.

During the two weeks preceding the flashpoint in Kargil on May 27 and 28, the Bombay Stock Exchange's barometer index of actively traded scrips -- the Sensex -- which had plunged below 3,000 last month, has rallied spectacularly and crossed the psychologically important 4,000 barrier to close at 4,123.58 on May 19. Likewise, the S&P CNX Nifty of the National Stock Exchange which had slipped below the 800 mark, has rallied to 1,177 on May 19.

This rally in equity prices is particularly spectacular: in one week ended May 15, the market capitalisation (share prices multiplied by the number of shares issued) of the BSE rose by over Rs 850 billion. This rally wiped out the Rs 300 billion (notional) loss suffered by investors in the wake of Jayalalitha-led exercise to topple the Union government in mid-April.

On April 17, when the government was voted out in the Lok Sabha, the BSE Sensex closed at 3326.98.

With yet another general election coming up in September, the sustained rally in equity prices and the extraordinary firmness of the stock market indices merit analysis and explanation.

Was the sharp rise in equity prices the consequence of a conspiratorial bull run of powerful speculators? Or was the contrarian phenomenon the natural consequence of the structural changes experienced by the Indian economy in the eight years? The last eight years, remember, were marked by 'radical' economic liberalisation and deregulation policy initiatives triggered by the Congress government in 1991 and sustained in spirit by all the four successive Union governments.

While one cannot entirely rule out speculative activity as the cause of the extraordinary rally in equity prices in these uncertain times, I am inclined to believe that this rally has been prompted by a growing awareness that the Indian economy has experienced a structural transformation of momentous growth and development potential.

For one, it is now quite clear that post-Independence India's socialist era, characterised by state domination of industry and case-by-case licensing, price controls and heavy-handed bureaucratic monitoring of business, is drawing to a close.

Both the major political parties which dominate Indian politics -- the Bharatiya Janata Party and the Congress -- as also most of the dominant regional parties are committed to the economic liberalisation and deregulation process which was initiated in July 1991.

One of the most significant political developments of the nineties is that though three different governments purportedly sworn to differing ideologies have assumed office in New Delhi since 1996, not one of them has attempted to backtrack on the issue of liberalisation and deregulation of the economy.

This implies that a great productivity leap forward which will sustain annual GDP growth rates of 7 per cent plus is in the offing. And since distance lends perspective, foreign institutional investors who are driving up equity indices on the Indian bourses, have been quick to discern the implications of this paradigm shift within the Indian economy.

A second structural change which the nation has experienced is the gradual emergence of a two-party political system. The one-year rule of the 18 party BJP-led coalition government has served the useful purpose of demonstrating to foreign and domestic investors that fears of constant communal strife and anarchy which would make life impossible for businessmen under a BJP government were unfounded.

Once elected into office, the BJP has perforce had to shed its religious extremism, particularly since it was heading a coalition government in which most of the allied parties were stridently opposed to the party's religious and sectarian fundamentalism.

The recent decision of the BJP and its allies to fight the next election under the banner of the National Democratic Alliance which promises to side-step the contentious subjects of Ayodhya, Article 370 and the Uniform Civil Code, is a welcome indicator of the BJP's emergence as a responsible middle-of-the-road political party.

The imminent general election is likely to witness a one-on-one contest between durable BJP- and Congress-led alliances with both of them committed to facilitating business in an increasingly liberalised and deregulated economy. Hence the optimism in the stock exchanges.

And a third and perhaps not quite obvious structural change which the Indian economy has experienced in recent years is that the hitherto suppressed and therefore dormant native entrepreneurial spirit of the people -- and particularly of the nation's middle class -- has been rekindled. The business newspapers and magazines are awash with stories of new path-breaking initiatives being taken by a new generation of entrepreneurial businessmen who have quietly assumed the reins of Indian industry.

And the success of India's newly emergent infotech companies in the global marketplace has confirmed that the spirit of enterprise which has enabled businessmen of Indian origin to succeed around the world has been rekindled within the subcontinent.

In this connection, the emergence and new-found assertiveness of India' 150-200 million strong English-speaking and outwardly-oriented middle class is undoubtedly a vital factor which has influenced foreign investors to prefer India as an investment destination among the emerging markets.

Despite the dismal political scenario, this is perhaps the only explanation why net investment in corporate paper by foreign financial institutions -- it was negative last November -- has risen to over $ 400 million in May this year. Gradually there is a dawning awareness worldwide that India's middle class is not only a huge market in its own right, but that it is equipped to engineer a great productivity leap forward which will galvanise the Indian economy in the new millennium.

Significantly, this awareness is not confined to foreign investors. Indigenous chambers of commerce and industry are more confident that their formulae for insulating the economy from political currents are likely to be accepted by the major political parties and several surveys indicate a rise in business confidence.

Moreover, though Indian industry is struggling in recessionary conditions, agriculture production has risen by 6.8 per cent in fiscal 1998-99. And stronger linkages are being forged between industry and the rural sector even as the services sector is experiencing double digit rates of annual growth.

Suddenly there is a rising awareness that the emerging consensus on liberalisation and deregulation is leveraging a gradual shift in the tectonic plates beneath the Indian economy, strengthening its foundations. Hence the bullish fervour in the stock exchanges.

Dilip Thakore

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