India Intelligence Report

   Stock Market Takes a Beating


The Indian Stock Market index SENSEX tumbled 826 points or 6.77% in the worst ever correction (in point terms) since 1992 prompted by a slew of international events, ill-informed reporting, Foreign Institutional Investor (FII) selling, and Government fumbles. By some estimates, the drop wiped out USD 69 billion in paper profits.

Several international events such as inflationary worries, interest rate hikes, global imbalances in trade, and oil price instabilities created a correction in the Indian market specifically the metals and materials sectors.

Finance Minister P. Chidambaram said that some papers have been reporting ill-informed information that the Government will tax FII as traders causing serious doubts among foreign investors about India’s economic reform policies. Calling this crisis “manufactured,” he said that some correction due to international events is necessary but not to this level.

Cement stocks which were on a bullish trend only two weeks ago took a bearish turn following Commerce and Industries Minister Kamal Nath’s statement saying that the Government may ban exports or import taxes on cement exports. This one ill-advised statement took the cement sector stocks to task even though the fundamentals are solid.

In the final analysis, the increased exposure to stocks is bound to increase stakes and panic in investors. Ultimately, the fundamentals for India are really solid.

  1. India can easily post a 8% growth rate

  2. India is the world’s 4th Gross Domestic Product growth engine

  3. India is the world’s largest telecom (especially mobile) growth engine  

  4. India is expected to surpass China despite the chaotic surface 

  5. India’s trade is spreading multiple ways and bilateral trade with China is soon to eclipse that with US

While the macro-economic scenario is positive, there are large threats to its growth and the big ones are internal:

Slowdown of economic reforms can quell inflow of investments and that will seriously affect the stock market and the Rupee. The evidence is the recent FII sell off and the impact on the stock market and the currency. 

  • Politicizing economic policies and causing disruption in economic development such as the ones during the strikes to protest the modernization of the New Delhi and Mumbai airports. For this, the Government should seriously co-opt West Bengal with an astute Chief Minister to counter communist pressure on the Federal Government from communists.

  • Reservation or imposing retrograde reservation policies on private sector. This will severely slow foreign direct investment (FDI) in India. Nath is on record saying that reservation will not affect FDI but he is also the man who changed a bull market in Cement sector into a bear trend.

  • Infrastructure investment will be crucial to keep the engine of growth going. Slowing investment in these sectors will choke any growth. As seen in Bangalore, the investments coming into Karnataka has slowed, large investments have fled to Andhra Pradesh, and some companies have already announced a curb on growth or newer facilities elsewhere. There is no reason to believe that the flight has to happen only in India. Many companies, led by Indian majors, are setting up operations in China and the West to offset the lack of employable people in India. There is nothing to stop them to expand those operations elsewhere to offset infrastructure choking in India. 
  • War is looming on Iran  and India has to take defensive action to secure energy supplies. This is exactly the reason why the Government should not artificially keep oil prices down as this is an unsustainable policy and can curb the effectiveness of state-owned oil companies from securing energy supply. 

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