Stock taking

The first thing that Thursday8217;s market crash tells you is this: India is now very much a part of the global equity markets which are affected by international news. Equity markets opened sharply down across Asia on Thursday, with an overnight decline of 3 to 4.5 per cent in countries such as Korea and Indonesia.

But while stock prices fell all over the world, why was the fall in India the sharpest 8212; at 7 per cent? This is because India now has the most liquid equity market among developing countries. So when a global fund manager wants to 8220;buy emerging markets8221;, his first port of call is India, because Indian equity is such a liquid market. Correspondingly, when a global fund manager wants to 8220;sell emerging markets8221;, his first port of call is also India. Generally speaking, Indian markets benefit from their reputation among global fund managers for liquidity, but it is to be expected that they are resilient enough to bear the brunt of shifts caused by a changing global view on emerging markets. Indian investors have made huge gains from the rise in stock prices over the last four years. We need to keep that in mind while looking at this week8217;s stock market losses: equity investment carries a down-side risk along with long-term superior returns. There is sometimes a harmful tendency in this country to personalise every large change in prices. The naive, ground-level perspective is that the price of a stock went up because 8220;someone was buying8221;. This could lead to pointless witch-hunts 8212; such as the investigation conducted by the Securities and Exchange Board of India into the drop in prices on May 17, 2004. But at a time when the Indian equity market represents an ocean of liquidity, it is impossible for any one person 8212; or group of persons 8212; to affect the broad market. The systems and procedures of the equity market are rugged and have proved their resilience over the last five years.

We must not, at the same time, ignore the fact that the drop in stock prices in India on Thursday was worse than in other countries. The stock market holds up a mirror to the economy. If the message is unpleasant, we should not shoot the messenger, but make sure that populist economic policies do not erode the economic progress that India has made over the last decade and a half.