Only stability can save the economy

The frequent changes in the governmenthave also spiked several reforms which would otherwise have led to higher inflow of foreign direct investments. The Parliament is yet to clear the Insurance Bill and derivatives trading these two have the potential of bringing in more foreign funds. Now investors are debating the shape of the next government and the fate of many of the reforms. As pointed out by the Confederation of Indian Industry CII President Rajesh Shah, 8220;political uncertainty would definitely hurt investment sentiment and the recovery process because the policy-making process had been halted.8221; Hongkong and Shanghai Banking Corporation HSBC, a foreign banking group, has said the economic situation does not suggest a broad market rally backed by economic fundamentals in the near future.

There are already ominous signs on the cluttered economic horizon. A study by the Centre for Monitoring Indian Economy CMIE has said net fresh investments during 1998-99 at Rs 55,962 crore was 63 per cent lower than the fresh investments proposedin 1996-97. The gross capital formation an indicator of new investment in both public and private sectors which was going up till 1996-97 is now coming down. It actually fell to 24.8 per cent of GDP gross domestic product in 1997-98 from 25.7 per cent in the previous year. This is expected to fall further in the current year. Even gross domestic savings had dipped to 23.1 per cent from 24.4 per cent of GDP last year. While the Reserve Bank of India says the money growth M3 is registering a 15 per cent plus growth, the fall in savings rate is serious.

When AIADMK withdrew support to the Vajpayee government, Sensex had crashed by almost 250 points in the next couple of days. Similar uncertainties had occurred when Deve Gowda and Gujral governments made unceremonious exits from the Centre in the last two years. The casualty is investors who are now facing a crisis of confidence. This is also one reason why foreign institutions investors FIIs, who had already burnt their fingers in South-east Asia, arepulling out from Indian markets. As per the records of the Securities and Exchange Board of India SEBI, FIIs, who invested nearly 9 billion in the last four years, had pulled out 624 million from India. 8220;We normally avoid investments in unpredictable times,8221; said an analyst with an FII broking firm.

Bombay Stock Exchange officials admit that nearly 50 per cent of the scrips around 6,900 companies are listed on the BSE are dud shares quoting far below their face value of Rs 10. Simultaneously, still there is no sign of over 500 companies which disappeared with around Rs 2,000 crore of investors. There is no reason why investors should return after seeing a huge erosion in their original investments.

This virus has further spread to new projects and investment avenues. The Centre for Monitoring the Indian Economy CMIE study has pointed out that most industries associated with investments like steel, cement and machinery have recorded declines or sluggish growth rate. On the one hand, freshproposals are not forthcoming and on the other hand, already proposed projects are being put on the back-burner or implementation of old proposals. In the manufacturing sector, during 1998-99 against 375 fresh investment proposals of Rs 44,294 crore announced, 59 projects worth Rs 45,851 crore were abandoned in the just concluded financial year of March 1999.

However, capital market experts point out that the government and policies alone cannot be blamed in full for the worsening investment scenario. The amount raised through issues has fallen to Rs 40,140 crore in March 1999 from Rs 45,550 crore in the previous year. A major reason for the sustained downfall was diversion of funds raised for the projects into the financial markets by promoters. This trend was rampant in the steel sector with several steel promoters diverting funds to other areas. Financial institutions estimate that over Rs 1,200 crore was diverted from six delayed steel projects alone. This is only tip of the iceberg. There has beenmonitoring of end-use of funds collected from the public in the last four years.

The most serious indicator of the dismal scenario is the fall in foreign direct investment. When one considers the plummeting value of the rupee against the dollar, the picture is far from rosy. Foreign direct investment inflow during the first ten months of 1998-99 at Rs 6,519 crore was 29 per cent lower than the Rs 9,128 crore foreign direct investment recorded in the same period of last year. The ongoing political turmoil at the Centre is expected to take further toll this year. 8220;We need a strong government at the Centre and a strong initiative to push the reforms forward. We need a better investment climate,8221; said Kapil Wadhawan, executive director of Dewan Housing Finance Corporation.

The litany of woes for investors is not showing signs of any relief. The collapse of several finance companies the latest one being the Kuber group which has gone down with Rs 500 crore and plantation companies has added fuel to fire.The corridors of SEBI8217;s Mittal Court head office which was once thronged by merchant bankers is now empty. Merchant bankers who led the investors up the garden path of investment8217; has disappeared from the scene and allowed their SEBI registration to lapse.

As it turns out, lack of policy framework and delays in reforms of public sector firms have prevented several investment proposals in power, ports, telecom and roadways being implemented. The biggest question now agitating the minds of investors is: will a fractious combination of political parties in the next government derail the reform process. The confidence of investors will have to revived. And for this, there needs to be stability and a will to take the reforms forward. Certainly, investors need a better treatment.