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The Rediff Business Interview/Harshad Mehta

'By 2002, India will be one of the two biggest and strongest markets'

As the Sensex defies all laws of gravity, Harshad Mehta, capital market genius, explains how the future lies with brain capital and companies ready to experiment with new ideas, not bricks and mortar. He argues that, in this new environment, creation of wealth is infinitely more important than old-fashioned notions of profitability. Pritish Nandy interviewed Mehta recently.

Did you in your wildest dreams imagine the stock market reaching such new heights?

Yes I did. In fact, I wrote a small article on this a long time back. People may have forgotten it but I tried to explain in that article how the financial revolution in India started in 1978. I described how the entire country would be transformed during the next 25 years. Starting 1978.

Why 25 years? Why starting 1978?

In 1978, for the first time, various FERA companies like Colgate and Castrol were made to dilute their holdings and come to the market. Prior to that year there was virtually no market worth describing. This was also the year when Reliance came out with its first issue. This brought in a new culture and lent a new shape to the market. We saw, for the first time, a new breed of investors entering the market. We were, at that time, 50 to 60 years behind the global markets.

But that was a long time ago? Surely we have changed a great deal since then!

Certainly. Since then, in fact, all the global markets have done exceedingly well. They have transformed with such breakneck speed that it is almost unbelievable. The Indian market too has changed and, by 2002, India will be on par with the best markets in the world. In terms of infrastructure, systems, people and financial reforms.

That means during these 25 years, from 1978 to 2002, when the world markets will have travelled 25 years (at remarkable, unthinkable speed) we would have done even better and actually travelled 85! At a pace such as this, how can we even anticipate what will happen the next day? Our only problem is that our systems remain somewhat out of sync. More than 95 per cent of our existing systems were meant for yesterday. Barely 4.5 per cent can cope with today's needs while only 0.5 per cent are capable of anticipating tomorrow's demands.

What has changed since 1978?

Many things. I would break these 25 years into four parts. Between 1978 to 1985 was the period of infancy. It was still a speculators' market and things were very gradually, very slowly changing. There were only two institutions around: UTI and LIC. They were also not particularly active in the market.

It was in 1983 that a new class of merchant bankers came in who made all the difference.

The next phase started in end 1984 with Rajiv Gandhi who introduced the first wave of liberalisation. This lasted till 1991. The importance of the capital market changed overnight. With the liberalisation of industry, the stock market came in as a vital link between savings and productivity.

Till then, we had a distorted system where all the money was going to the banks. Out of which 62 per cent went towards funding the government and out of the balance 38 per cent, 25 per cent was going towards priority sectors. So there was hardly any money available to enhance productivity.

The little money that was left over invariably went towards sustaining the profitability of the banks. So the banks found it very difficult to give money to industry and wait for productivity to increase. So they went in for trading. It was the safest activity for them.

So productivity languished even as 36 banks and four institutions controlled the entire industrial growth of the country. The economy was fractured. On one hand, we had the highest savings rate. On the other, there was no money for production. It was a terrible gap that the capital market finally bridged when it created a direct link between savings and industrial productivity. These years formed the period of liberalisation. We saw 23 markets coming up from only two. It was a complete transformation of the scene.

The third phase?

1992 to 1997 was the period of globalisation. People who had never heard of W I Carr and Merryl Lynch were suddenly exposed to global players, global trends. The capital market began to find many new players and even the government started getting interested in it because it saw the huge inflow of foreign exchange that it attracted.

And now we are in the fourth phase, I presume?

That's right. We are in the fourth and last phase. It is like building a house. Even when 80 per cent of the house is ready, no one has any idea of what it is going to look like. The last 20 per cent is the most crucial. It completes the entire dream. We are in that phase now.

The period from 1998 to 2002 is the period of transformation. You will now see the rooms, the windows, the colours, the finish, the magical transformation of the marketplace. The pace will be even more breakneck now.

The first 20 years went towards changing the culture, the attitude, the mindsets. The last five years will see the complete transformation of the market, its maturity, its shining brilliance.

What will the market be like in 2002?

If will be one of the two biggest markets in the world and possibly the strongest. I had earlier predicted that it would transact over Rs 300 billion per day. Now I think it could be even more. Amazing things have taken shape, quietly but strongly. Attitudes have altered; mindsets have changed. Now anything is possible.

The foreign players have come in, in a big way and even though they may not have made the kind of profits they expected to, they have realised the huge potential of our market. The day they make successful killings, the market will explode. It may sound very radical when I say this but the Indian capital market is all set to see a boom the likes of which we can never anticipate.

The signs are all there. Everyone is moving away from profitability towards wealth creation. Brain capital is acquiring more and more importance than all this bricks and mortar stuff. In fact, you have been saying this for a while now, in your columns. You have described it as the value of the intangibles.

The importance of ideas, talent, creativity. These will become the most valuable in the capital market of the future. They will drive the future of Indian industry, break open new frontiers and challenge the entire thinking process which has till now dominated our investment decisions. I do not entirely accept your point of view that tangible assets will be of no value in the future...

I did not say that. I said that the value of intangibles will always be infinitely more than the value of the tangible assets that our banks and institutions currently give so much more importance to. But tangible assets will also have a role to play...

Yes, brain capital will be recognised for what it actually is. The ultimate creator of wealth. A value enhancer. And the future eventually lies with those who are brave enough to see it.

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