Financial profiteers are once again seeking to influence economic policy in their favour. On Friday the 14th of May, the Bombay Stock Exchange Sensex collapsed by 330 points to 5069. The media headlined this development, highlighting its magnitude by focusing on the fact that it was the biggest single-day decline in four years. One financial newspaper, the front page of which is an insult to the intelligence of anyone whose eyes may set on it, banner-headlined its estimate that the fall had wiped out Rs. 1,00,000 crore of paper wealth.

A collapse of the Sensex per se should bother none. The stock market even in the US is neither a significant source of finance for new investment nor a means of disciplining the managers of firms. It predominantly is a site for trading risks and is mainly a secondary market for trading pre-existing stocks or new financial instruments, such as derivatives, that are based on them. Therefore, if anybody loses from short term swings in the market, it is only those who have speculatively invested their wealth in trading stocks in the hope of quick capital gains. That such speculators dominate the market and can indulge in deception to earn their profits is clear from the multiple instances of accounting fraud and market manipulation that have recently come to light in instances varying from Enron to Merrill Lynch. These features are even truer of the Indian stock market in which few shares are actively traded, few investors such as the financial institutions, big corporates and foreign institutional investors dominate, and a small proportion of the stocks of most companies are available for trading. What is more, nobody has inflicted on investors the notional loss that has occurred in India's markets prior to and after the elections. Some market participants have brought it upon themselves and other investors.

However, market analysts and the media have gone to town suggesting that the reason for the May 14th collapse were statements by leaders of the left parties that the new government should shut down the separate Ministry for Disinvestment created by the NDA and revise the policy of privatising profit-making public sector units. This may well be true. But it is important to pose the right question. Was the "error" that triggered the market's fall attributable to the leaders concerned, who were merely articulating their well-known positions on a controversial matter like privatisation, or to the knee-jerk reaction of speculative investors who were hoping to reap huge profits out of further doses of privatisation at bargain prices?

It is clear that although dissent over disinvestment was the specific trigger for the May 14th decline, if the new government is to respect its mandate there are a host of policies that it will have to adopt which could result in a similar collapse of expectations and the Sensex. Thus, the government may have to moderate increases or even reduce the administered prices of a host of direct and indirect inputs such as power, oil and fertiliser, in order to alleviate the difficulties being faced by the farming community. The implicit subsidy this involves may have to be financed in the first instance by an increased resort to deficit financing and in the medium term through an increase in direct taxes on the higher income groups and indirect taxes on luxuries. Such fiscal adjustments may be necessary also to launch large-scale employment generation programmes to make up for the slow pace of employment expansion and the consequent persistence of poverty during the 1990s. Further, similar policies may be needed to widen the coverage and increase the availability of subsidised food through the public distribution system. Increased food availability at subsidised prices is crucial to reversing the decline in per capita food consumption and in calorific intake reported by the NSS surveys in a country where a large proportion of the population is at the margin of subsistence.

All of this would be seen as "populist" and "anti-reform", since NDA-style, IMF-inspired reform requires a cut in the fiscal deficit, a lowering of direct taxes, an increase in administered prices and a reduction in subsidies. Any attempt to redress the intensely inegalitarian path of development under the NDA can therefore be identified as damaging by the "market" and those who advocate its cause. In fact, sections of the media that had celebrated neoliberal economic reform under the NDA, have implicitly declared that all of the policies noted above can be a cause for market distress. The markets are nervous, they argue, because of uncertainty about the attitude of the new government regarding the "economic reform" process.

Note the use of the word uncertainty. The election result that contrary to all expectations delivered a massive defeat to the NDA clearly indicates that certain aspects of the reform must be reversed. The defeat the BJP and its allies suffered in all but three states has been widely seen as the result of two factors: mass rejection of the communal policies of the BJP and mass anger with the devastating impact of the neoliberal economic policies of the NDA government on rural India and the poor and lower middle classes in urban India. That anger was all the greater because of the cynical way in which the NDA was seeking to win another term by misusing manipulated indices of economic performance and celebrating the gains that a small upper crust had derived from the liberalisation process. Given the nature of this mandate, unless the new government currently being formed refuses to take account of its full meaning and reneges on its own election promises when formulating its policies, a substantial dilution and major reversal of certain components of the NDA government's economic reform are inevitable.

Thus if few investors who drive the "markets" are nervous about the nature of economic policy, the error lies in their expectation that economic policies which benefit them but adversely affect the majority can be sustained in a democracy where the poor have a voice, even if only at intervals of five years. Those expectations were patently wrong and so were the bets based on them. This is not to say that adopting policies that are less elitist would not guarantee investors normal profits. They only threaten the abnormal speculative profits that policies tailored to please finance and big business, such as privatisation, were expected to ensure.

Seen in this light, the message that has been delivered by the "markets", and sensationalised by the media ever since the exit poll results suggested that an NDA victory is not certain, should be dismissed as undemocratic and unacceptable. But the matter is not as simple as it may seem. The real difficulty arises because, enticed by the lavish returns that the policies of the NDA government promised, foreign institutional investors have poured investments into India and come to occupy an influential presence in the markets. These investors are known to have brought in over 10 billion dollars into India's stocks markets during the last financial year. When they choose to sell out, convert their rupee gains into dollars and exit from the Indian market, the demand for foreign exchange tends to increase. In India's liberalised foreign exchange market this weakens the value of the rupee, as seen in the significant decline over the first fortnight of May 2004. Movements of this kind can trigger a speculative attack on the currency and threaten a currency collapse. That possibility has substantially increased over the last one year because, drunk with the hype that India's rising foreign reserves generated, the NDA government has significantly liberalised capital account transactions and allowed Indian residents to legally and otherwise transfer their wealth out of the country. Hence, if a speculative attack on the rupee results in capital flight, domestic wealth holders may join the herd and help precipitate a crisis. A currency crisis of this kind can have damaging consequences for the real economy, necessitating painful adjustments even in countries where the real economy was initially doing well.

Thus, it is not the losses suffered by investors in the market as a result of their unwarranted expectations that are the problem. It is really the fact that FII investors whose expectations had fuelled the speculative highs the markets had reached can damage the real economy to an extent greater than what was achieved under the NDA. To boot, it appears that even a mere restatement of the well-known positions of individual parties that would be associated in some form with the post-poll government can trigger a market collapse.

This has some lessons for policy in the days ahead. The patently irrational behaviour of finance cannot be allowed to influence policy making, since that would amount to allowing the authoritarian "mandate" of a miniscule minority of speculative wealth-holders to overturn the democratic mandate of the majority. Since the actions of the minority of wealth-holders threatens to diminish the manoeuvrability of the new government and undermine its ability to fulfil the people's mandate, the authoritarian threat from finance needs to be met. The response should not be to dilute the thrust and efficacy of a new economic programme, but to bolster it with controls on currency and capital movements that restrict speculative activity and restore power to the levers of economic policy. There is a large menu of polices to control speculative capital flows and stall speculative attacks on a currency that is available in the books. At the time of the Asian financial crisis President Mahathir of Malaysia experimented with some of these in a small way with much effect. There is no reason why the new government cannot use similar means, with greater vigour, to deliver on the promises that won it a mandate and demonstrate the vitality of Indian democracy.

But otherwise, the current downslide in the stock markets is really not a matter of serious concern for most Indians, and it should certainly not be much of an issue for the new government either. The mainstream English language media, whose business interests increasingly coincide with those of finance capital, may continue to shout itself hoarse about it. But then, as the recent electoral cataclysm has shown, these media also do not reflect the interests of the Indian people, nor do they even understand them.

May 17, 2004.