India must bridge the trust deficit

At the time when anti-corruption social activist Anna Hazare was captivating the country with his inspiring fast unto death, another equally distressing drama was being played out in the country’s stock markets. The indices of most stocks, which had started declining from the beginning of August, sank to their lowest levels in 14 months, wiping out thousands of crore of investor gains.

The Sensex, which is considered the best barometer of the Mumbai stock exchange, hit its nadir just when it seemed that Mr Hazare’s stand-off with the government would come to naught.
The diffusing of the political crisis coincided with a gradual rebound in stock indices. Since then the Indian stock market seems to be stabilising.
No stock analyst, however, attributed the Sensex drop to the political crisis engendered by the Anna Hazare fast. The markets, they claimed, had been spooked by the global downturn and US monetary policy. Indian brokers were watching US Federal Reserve chairman Ben Bernanke’s moves more closely than domestic developments. The world seemed to have become a little too interconnected for comfort.
While there could be no doubt that developments in the global economy, especially the developed ones, would have an impact on the Indian industry, few analysts admitted that a bigger factor could be the domestic economic environment.
A lot of companies witnessed losses in their share values primarily because stock analysts found that as much as 46 per cent of Sensex companies had underperformed. It was clear that foreign financial investors felt things were not going so well for the Indian economy and decided to book profits while the going was still good. A major cause of the August stock prices trough was the withdrawal of $1.6 billion from Indian markets by foreign investors that month. This made the Indian stock market the worst performer among emerging markets after Brazil.
The problem is not lack of money; there is, in fact, too much of it floating around the world. Global investors do not know where to park their cash and have been mopping up US Treasury Bills even though they give negative returns only because it is reliable. Money is also going into gold and silver, raising their prices to historical highs. The problem really is lack of confidence in business performance in the Western economies and uncertainties in the emerging markets. This holds true for India as well.
The Indian economy is beset with a host of fairly serious problems, all of which are making global as well as domestic investors apprehensive.
Every economic indicator suggests that the overall GDP growth is declining and economists feel it will be impossible to maintain eight per cent growth this year. Most predict the GDP growth this fiscal will be 7.2 per cent or lower.
The economic slowdown in the country has been attributed to various factors. A recent Morgan Stanley report blamed a combination of factors for lower growth figures, “including persistently high inflation, higher cost of capital, cut in the ratio of fiscal spending to GDP, a weak global capital markets environment and slow pace of investment”.
One other factor that has been widely cited for the drop in growth and investments is the effect of scams and corruption scandals on the government’s decision-making process.
A bigger problem is uncontrolled inflation that is eating into household incomes and triggering continuous hikes in the RBI’s prime lending rate.
The real devil seems to be government profligacy. Ballooning subsidy bills, a slew of populist programmes and general fiscal indiscipline has thrown government finances out of gear. Government data released last week revealed some frightening trends. Despite promises to contain the fiscal deficit in a systematic manner, this gap more than doubled in the first four months of this fiscal year as compared to the same period last year.
The figures suggested that the deficit of `2.2 lakh crores during April-June this year is already more than 63 per cent of the budget estimate of `3.07 lakh crore for the entire year. The government is both sucking in funds from the system as well as spending it on non-productive heads.
This is irresponsibility at its worst during a period of high inflation. To make matters worse, the government has massively hiked procurement prices of foodgrains and has simultaneously held on to public grain stocks, thus aggravating food inflation. At the same time, high domestic inflation and economic uncertainties have kept the rupee down in relation to the dollar, leading to a failure to compensate for high commodity prices, especially that of oil and gas. Rising energy prices have further added to inflation, thus setting up a sort of vicious cycle from which the economy seems unable to fully extricate itself.
The government by failing to control its deficit is living beyond its means. This suggests it has learnt little from the crisis that has scuppered the world’s largest economy as well as a number of smaller European Union countries that are today on their knees because of irresponsible government deficits and borrowings.
India desperately needs to pull in cash from the vast global pool of available funds for investment in infrastructure, retail and so on. To do that the economy needs to become and look like an attractive investment opportunity. Unfortunately, that is not going to happen unless the government gets its act together.

Indranil Banerjie is an independent security and political risk consultant