The week ended April 30 witnessed a collapse in India's stock markets. On Wednesday, April 27, the Sensex fell by 213 points, wiping clean an estimated Rs. 55,000 crore of paper ''wealth''. This was the largest single-day decline in over three years. Over the rest of the week the markets moved further down, indicating that ''Black Wednesday'' was possibly not just a stray blip on the trading screen. With evidence that foreign institutional investors who were earlier pumping foreign currency into India's markets were holding back, the rupee too witnessed a reversal of the rise that excess dollar supplies had been resulting in.

There is unanimity among ''analysts'' of the factor driving the downturn: news from the exit polls - the most ''scientific'' of available predictions - that the NDA is unlikely to win a majority in the elections, which may throw up a hung Parliament. In the run up to the elections, India's ''upper crust'' - consisting of ''the markets'', the media and large sections of the urban middle class - had convinced itself that the results of the elections were a forgone conclusion: the NDA would form the government; only the margin of victory was a matter for debate. The initial opinion polls only confirmed this belief.

It is therefore not surprising that the results of the exit polls at the end of two rounds of voting came as a shock. To boot, subsequent opinion polls have also pointed to a lower vote and seat share for the BJP and its allies in the remaining two rounds. This rather convenient shift in opinion poll results has allowed the media to portray the signals from the exit polls as being the result of an end-of-game change of mood that the earlier opinion polls could not capture.

If the dramatic shift relative to those early opinion polls does in fact materialize, it would be hard to explain, even by taking resource to the Rahul-Priyanka factor or some such imponderable. With little having changed in terms of the policies, structure and disunity in the Congress, and all the major non-Congress players having been on the scene right from the start, the truth would be that India's upper crust had got it wrong. It had failed to sense the mood of the ''other India'', which was unwilling to go along with the celebration of the NDA's rule and policies that the explicit and implicit ''India Shining'' campaign involved.

What is noteworthy is the quick response of the market, which has declared its displeasure with actions that not only erode the wealth of its own constituents but, through their impact on credit and foreign exchange markets, threaten a crisis in India's liberalized financial sector. Market developments over the week ended April 30th cannot be explained by the stray action of a few unhappy and/or nervous investors. The herd instinct, so typical of financial markets and especially of foreign institutional investors, has resulted in concerted action that threatens a sharp decline. And in India's markets, which are neither wide nor deep, a small herd can make a big difference.

On the surface, an early correction of the baseless expectations of a few financial investors should not be cause for worry. Few can demonstrate that India's till-quite-recently inactive financial markets drive the economy. However, the problem is that the crises that such changed expectations resulted in elsewhere in East Asia, Latin America, Eastern Europe and Turkey show that they tend to damage the real economy as well. Moreover, when the crisis of finance becomes a crisis of the real economy, its burden falls disproportionately on the poor and the lower middle classes, even though they do not participate in or often are not even conscious of the workings of financial markets. Having invited foreign financial investors into their economies, countries find that ignoring their sentiments and/or closing the door on them when they retreat, involves painful adjustments that the people, and therefore democratic governments, find hard to face up to.

This feature of the play of fluid finance has become a source of power for financial interests. The threat of exit and of a consequent crisis is now routinely held out as reason to do anything that whimsical financial interests demand. This threat is not just implicit, as revealed by the actual experience with the withdrawal of financial investors from one or the other emerging market. It has in recent times become quite explicit. We only need to recall the financial drama that preoccupied Brazil as it became clear that Lula and his Workers' Party would win the polls in 2002. To prevent fear of a crisis from changing the electoral result, Lula had not merely to promise to refrain from doing anything that would upset international finance, but also, after his victory, implement a substantially diluted and pared down version of his original manifesto.

The signal sent out on the Black Wednesday of the last week of April in India was similar. By threatening a pullout if expectations of an NDA victory were not realized, those who sway those markets, especially international financial investors, were sending out two signals. First, they were signaling the electorate that any outcome that is not in keeping with the expectations of finance and the ''upper crust'' can be damaging for all. Second, they were signaling any possible formation other than the NDA that may in fact come to power after the elections, that statements and policies that displease finance could be suicidal.

The BJP, which has all along been making a case for an electoral verdict that strengthens its (and not the NDA's) hands and allows it to continue the policies that in its view make India shine, has been quick to exploit these signals from the financial markets. For example, on April 30, BJP President Venkaiah Naidu, on the campaign trail in Jaipur, declared: ''The market reaction to the (exit poll) predictions give an idea how the economy would respond when the BJP and its allies appear weakened. The poll predictions have made the economy suffer. The markets have crashed and the rupee value has come down and this is only a trailer.''

This use of market sentiment as a vote-gathering device is in keeping with the collusion between the NDA government and financial capital. The BJP-led NDA government has been blatantly ''market friendly'', keen to placate big business and international finance and desperate to resolve its budgetary difficulties by selling some of the most valuable and profitable of public sector assets at extremely attractive prices. Foreign players, whose presence in India's financial sector has increased substantially as a result of liberalization, and Indian big business, were the biggest beneficiaries. So were those who managed or facilitated their investments.

The exit polls hold out a threat to those profits. A hung Parliament would undoubtedly delay the process of government formation and make policy-making a more democratic and consensual, and therefore a slower and perhaps less market-friendly process. It is the latter which has upset those who people and invest in India's markets. They have for the last five years become attuned to policies that have made India the flavour of the season for international capital, especially mobile financial capital that has diverted huge investments into India's lucrative markets and fattened India's foreign exchange reserves.

This discovery of India by international finance explains in part the ''India Shining'' ethos and the confidence in the NDA among the nation's upper crust. The increase in liquidity that capital inflows resulted in triggered a housing finance and consumer credit boom in the non-agricultural sector. Coupled with India's software and outsourcing ''mini-revolution'', it helped create a booming enclave economy.

Besides those who directly profited from these developments, there were others who were gainers in this new situation. A relatively small group of middle class Indians gained access to better paying service sector jobs. Their incomes and the easy availability of credit finance allowed them to consume a host of commodities that invaded India's shopping malls after liberalization. In pre-liberalization India, middle class success depended on entry into government or migration abroad. Now, private sector employment at home promised a taste of the lifestyles that successful migrants led outside the country. The short span of time in which this transformation occurred held out a hope for others, who expected the boom to persist at least till they found themselves a slot in the charmed circle of India's post-liberalization elite.

It must be said that the boom in the liberalization-created enclave not only generated some demand elsewhere in the economy, but also drew other sectors into its fold. Principal among these were the media, which not only thrived and proliferated because of the advertising bonanza that the boom generated, but financed their expansion with the help of the liquidity that financial liberalization provided.

Unable to see beyond their own circumstance, these sections that have come to benefit from the new regime did believe that governance in India had changed for the better. If in addition, the opposition was disunited and the Congress in disarray, victory for the NDA seemed inevitable. What was missed was the damage that the NDA government's policies had done in terms of the worsening livelihoods of the farming community, the displacement of already employed workers, the fall in the rate of generation of new employment opportunities, the increases in the cost and decline in the availability/quality of public services and the collapse of the small business economy. The losers inhabiting this large universe, the other India, could be voting against the NDA even if not for the opposition, if the exit polls are right.

When the NDA came to power, the perceived danger was a widening communal divide, which has indeed materialized and marginalized the minorities. What was not expected to the same degree was the widening economic divide, which has remained relatively unnoticed, but is becoming visible as the exercise of winning the voter has proceeded.
The signals the markets are sending out midway through the election process is that even if the evidence points to the fact that this division makes it difficult for those who widened it to remain in power, the policies that create the divide must remain in place. What matters is the success of the enclave that liberalization generates, not the well being of the rest who must be coerced into voting for governments and policies that surrender sovereignty at their expense. The exit polls suggest that the ''other'', predominant India may be unwilling to submit to these authoritarian ambitions of finance capital.

May 3, 2004.