Some years ago, when the stock market was in one of its periodic crashes, the then finance minister was asked what he thought of it. He said he was more worried about Khan Market (in New Delhi) than the stock market in Mumbai, an indication that he was more worried about the common people than the stock market going up or

down, which is normal. He was on the dot. The stock market’s contribution to GDP is negligible. Going up or down is normal and, predictably, no one complains when the market goes up at a scorching pace. But everyone complains when it goes into correction mode. However, the recent loss of over 1,000 points in the first five days of trading in the New Year was no ordinary fall. Its losses were steep even when compared to the global markets. Foreign institutional investors dominate the Indian stock markets and these FIIs have been net sellers in the New Year. India’s domestic problems have made the US markets look more attractive, specially because there are signs of a recovery and a strong dollar. India, on the other hand, is in the throes of one crisis after another — high inflation, high interest rates, high fiscal deficit, a semi-paralysed government that has been putting off decisions on reforms, postponing decisions on the goods and services tax, on diesel prices, and even on the sale of Cairn Plc to Vedanta. The numerous scams and scandals involving top banks in the bribes-for-loans scandal have also taken their toll on the government and much of the sheen off the stock market. The stock market dislikes uncertainty and the government is not perceived as tackling this uncertainty decisively. Governance is at a discount in Delhi.
With the credit policy to be announced by the RBI on January 25, the uncertainty over whether or not interest rates will be hiked hangs over the market like Damocles’ sword, and over the people in general, as housing and auto loans etc. will become more expensive. The extremely low index of industrial production released on Wednesday is being used by India Inc. to buttress its plea that interest rates should not be hiked as it would affect production further. But the government is in a catch-22 situation. The common thinking is that not increasing interest rates may aggravate inflation further. On the other hand, if rates are increased, the credit offtake will fall as industry will be squeezed of funds. But food inflation is the most worrying as it is a supply problem. Tinkering with the monetary policy will not help supply-side issues. Shortages are made worse by hoarding and, therefore, food prices are high. The bungling of the agriculture and food and civil supplies ministry has exacerbated the situation. The PMO should oversee this ministry with a sharp eye. The government may even need to take harsh decisions to show it is serious about tackling the problems affecting the economy and the stock markets. Till today, except for an inconclusive emergency meeting and lots of platitudes, nothing concrete has emerged. Even the new telecom minister seems more concerned with saving his party and contradicting the CAG rather than getting on with recovering from the telecom companies the money for excess spectrum and that lost from other acts of omission.