The 541 point, or 4 per cent, crash in the Sensex on Wednesday coincided with P. Chidambaram’s fourth budget under the UPA administration. But that’s just where the coincidences end. The reasons for this fall lie outside the Budget, outside Parliament, outside the Indian economy — they lie in China, Philippines, Brazil, Mexico and, of course, the US.They have been lying there ever since the tech boom of 2000, when brokers would look at the Nasdaq to gauge the mood of the Sensex — if AOL, Amazon and Cisco rose, Infosys, Wipro and Satyam would follow, taking the Sensex up; and vice versa. Wednesday’s fall illustrates a future that happened seven years ago, when the Indian markets began to understand, theoretically and practically, their integration with world markets.This process of integration with world markets began in 1993 when FII regulations were drafted. The very next year, riding $4 billion of FII inflows, the Sensex touched its all time high of 4,630 on September 12, 1994, as new money entered the Indian market. Three years later, in 1997, a pleased Chidambaram noted that the cumulative FII inflows stood at $7 billion. The scale has changed in the decade since: last year the additional inflows were over $10 billion.An evolution of India’s global integration is on, but before we walk the long way ahead towards a seamless merging of capital flows, it would be prudent to pause and look behind, learn from history of crises. Between 1987 and 2000, the world saw three major crises — Black Monday of October 19, 1987, Tequila Crisis of 1994-95, and the Asian Crisis of 1997.Black Monday saw the Dow fall by 508 points or 23 per cent to 1,739. This fall, however, was not restricted to the US alone. By the end of the month markets in Hong Kong, Australia, the UK and Canada were down between 22 and 46 per cent.During this period, the Sensex stayed put at 461. By the end of the month, it was down by a statistically insignificant 2 per cent, based more on where the Bofors controversy would end and what it would do. And, of course, whether Dhirubhai Ambani would win the chemicals war (if he did, Reliance would rise and take the Sensex up; if not, the Sensex would fall). Global factors didn’t matter.The next global crisis erupted in December 1994, soon after Ernesto Zedillo became Mexico’s president and within two weeks orchestrated a ‘megadevaluation’ of the Mexican Peso — what began with a 13 per cent fall on December 20, ended the month by falling another 15 per cent; in the next four months, the Peso had halved. The herd of global investors stampeded out of Mexico, and global markets faced the spillover — from Argentina, Brazil and Chile to Philippines and Poland, one market after another crashed.The Sensex fell by 14 per cent to 3,356. But not because of Mexico. This fall was more due to fears of interest rate rises that RBI had planned that would make stocks less attractive than bonds. Besides, even as global markets picked up following US government intervention in Mexico, it took the Sensex 17 months to recover. Clearly, India was following its own story, though a small crack had opened up because of FII investments.The last big crisis of which India was not a part was the East Asian financial crisis that began as late as July 1997, first in South Korea, followed by Indonesia, Malaysia, Thailand and the Philippines. All these countries had raised and maintained high interest rates to attract foreign capital. This capital raised asset prices sharply and when the currency bubble burst, asset prices crashed. The reverberations were felt as far as in Russia and Brazil in particular and emerging markets in general.The Sensex remained unaffected. In fact, within a month of the Asian Crisis, the Sensex was up 5 per cent to 4,523. India’s currency being unconvertible was cited in policy circles as a virtue that prevented the country from joining the falling dominos of emerging markets. While the market stagnated during the next two years, by October 1999, as Asian Tigers were blaming George Soros for their plight and repairing their economies with IMF and other multilateral loans, the Sensex had crossed 5,000.September 11 changed all that. Following the bombing of the two towers, as the world markets crashed, the three US exchanges closed down till September 17. When they opened, the Dow fell by 7 per cent and by 14 per cent by the end of the week. Meanwhile, UK was down 6 per cent, France by 7 per cent, Germany by 9 per cent. Latin American markets fell by 5-9 per cent.This time the Sensex too collapsed. It fell by 118 points — or 4 per cent — to 3,033 the next day and by 15 per cent or 470 points within four trading sessions. This integration with world markets also coincided with a geopolitical integration as the world realised, three months later, by the December 13, 2001 attack on the Indian Parliament, that India has been and continues to be a victim of terrorist attacks. Since then, the journey of the Sensex has more or less mirrored the world markets — and that’s what happened on Wednesday. Up 2 per cent yesterday, it is for now reflecting the West (US, UK, Europe, the Americas are all up), not the East (China, Taiwan, South Korea, Hong Kong are all down).Going forward, if there is one major risk the world’s financial markets face today, it is a slowdown in the US economy. Already the R-word is being bandied about by scholars and commentators and discussions focus on soft- or hard-landing. The recession was expected to hit in the first quarter of 2007, but is now being seen to come in the third or fourth quarter. Surely this will impact India adversely, as it will the rest of the world. But only technically, as global money pipelines shrink. Fundamentally, because of strong domestic consumption and potentially huge investments in infrastructure, its impact may be lesser on India than, say, on China or Brazil. Either way, global financial integration remain keywords and global markets, key drivers.
