June 16, 2006

India's Stock-Market Slide Is Good for Economy: Andy Mukherjee

June 15 (Bloomberg) -- For all the pain that it continues to inflict on investors, the crisis in the Indian stock market is a blessing in disguise for the country's economy.
The Bombay Stock Exchange Sensitive Index has slumped 29 percent since May 10, thanks to overseas institutional investors selling a net $2.3 billion of Indian stocks.
This money may not be coming back in a hurry.
A Merrill Lynch & Co. fund managers' survey released June 13 showed that India's weighting among Asia-Pacific investors had collapsed to its lowest on record.
The drop in the risk appetite for Indian stocks has a silver lining: Now that India has been pushed off the gravy train of easy money, Prime Minister Manmohan Singh will have a strong incentive to focus on steps needed to improve the country's business climate and competitive position.
In the two years that it has been in power, Singh's government has had to do little for the economy, which drew a large part of its strength from a 27-month-long acceleration in bank credit, the longest such spell in India since the early 1970s, according to Morgan Stanley.
This exceptional credit growth was fueled by the $20 billion of overseas money that went into the Indian stock markets from June 2004 to April 2006.
In May 2004, when Singh's Cabinet was being sworn in, a cyclical revival in manufacturing was under way in India after several years of an investment drought.
As demand for money rose, the new government quickly receded into the background and made economic growth the responsibility of the central bank, which kept interest rates low to spur business expansion and consumer spending.
Missing Zeal
Equity investors, feeling flush with a 154 percent, two-year surge in the Sensex and impressed by the 9.3 percent expansion in gross domestic product in the first quarter of 2006, haven't complained as loudly as they should have about the lack of policy action to sustain the growth momentum.
In the past couple of years, I have heard very few investors rage about the stalled Indian state asset-sale program. Fewer still have ranted about the government's continued tolerance for archaic labor laws that force employers to choose machines over men. The most draconian of these laws was supposed to be struck off the statute books five years ago.
There are many areas where Singh's government has failed to deliver on its promises because its communist backers won't let it. One such proposal that has hung in limbo since at least February 2005 recommends throwing open the $178 billion-a-year Indian consumer market to global retailers.
A January 2006 announcement that India was ready to receive ``single-brand'' global retailers was a half-hearted step. Big- ticket retail investments in India will come when multi-brand chain stores such as Wal-Mart Stores Inc. and Carrefour SA are allowed in; and that isn't even on the horizon.
Broken Promises
Similarly, Finance Minister P. Chidambaram promised in July 2004 to allow overseas investors to raise their stakes in insurance joint ventures to 49 percent, from 26 percent.
Two years later, the plan is still stuck for lack of political consensus. Manulife Financial Corp., Canada's biggest insurer, this week flatly refused to look at India until it was allowed to control at least 49 percent of the business.
The proposal for deregulating the pension industry, too, is mired in political opposition.
It isn't that the Indian government is utterly helpless because it relies on communist parties for its survival. In areas where it has tried harder, it has met with greater success.
Singh overcame strong opposition from the Marxists to push for a civilian nuclear agreement with the Bush administration. The accord, if it is approved by the U.S. Congress, would secure fissile material supplies for India and ease the country's chronic power shortages.
Bolder Approach
In the face of stiff opposition from labor unions, the prime minister stood his ground on the government's decision to award contracts to private parties for upgrading the prehistoric New Delhi and Mumbai airports.
It is time the Singh government took a bolder stance on a broader range of economic issues, including the rapid nationwide implementation of a 2003 law that will bring down the cost of electricity for businesses that currently pay twice as much as their competitors in China.
The previous Indian government of Prime Minister Atal Bihari Vajpayee had to work hard for the $2.9 billion it raised over four years from selling 22 hotels and 12 state-owned companies to strategic investors. Almost none of the deals were easy. In most instances, workers protested against the passing of management control to private owners. In several cases, the ministers in charge of overseeing the management of these state companies were themselves opposed to the sales.
Easy Money
The present government, by contrast, has been spoilt by easy money. It raised $585 million in just one minute in October 2004 by selling a small stake in NTPC Ltd., India's biggest producer of electricity, on a stock market that was starving for Indian issuances.
No wonder then that Singh's administration hasn't attempted outright asset sales even when its communist allies have sold -- even shut down -- unprofitable government-owned companies in West Bengal, the eastern Indian state where communists are in power.
If a depressed stock market fires up Singh's government, it will be a price worth paying.
(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)


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