When Jaya sneezes, investors shiver as Rs 40,000 cr blows away

Today, although the Sensex eventually recovered and gained a total of 22 points over the previous close, things looked awful in the morning with brokers worriedly confabulating on the import of Jayalalitha’s Delhi visit this evening.

During the day, the Sensex continued last week’s plummet, falling 60 points, translatinginto another potential loss of Rs 9,000 crore in the collective shareholder’s wealth. Fresh buying by local financial institutions as well as some others who sensed an opportunity with prices falling so low, helped the Sensex recover somewhat.

Even with today’s partial recovery, taking the Sensex to 3463, the market is close to what it was just before the budget was presented. In other words, whatever spectacular gain was made by the Sensex following the budget, has more or less been wiped out by the antics of politicos like Jayalalitha and others.

With the political situation still far from fluid, the market is expected to continue to slide further, lifting perhaps from time to time on faint hopes of the government surviving because of the DMK not wishing to have any truck with the AIADMK, or perhaps Om Prakash Chautala’s MPs deciding to side with the BJP, or even the possibility of a split in the AIADMK, the wishful thinking goes on.

A virtual mirror-image of the current crisis, and its aftermath onthe country’s stock exchanges was the situation prevailing exactly two years ago, when the Congress first pulled the rug from under the United Front’s feet.

From 3,663 on March 28, 1997, the Sensex plunged to around 3,300 on March 30, recovered to 3,560 on April 2 when it looked that the Congress may just fail to pull it off, went up 130 points on April 9 when the Congress began making conciliatory noises… the rest is history.

Now, as then, various chambers of commerce have already begun meeting political parties, to request them not to play political football with the budget. And to ask them to adopt the budget presented by Finance Minister Yashwant Sinha on February 27, even if the Vajpayee government falls in the forthcoming session of Parliament. For if they don’t, the results will be disastrous. Apart from the expected bloodbath on the country’s stock exchanges where the Sensex and the market cap will plummet, the failure to pass the budget will result in widespread chaos in industry.

As per thecustoms and central excise rules, all indirect tax proposals made during the budget have an automatic validity of 75 days during which they have to be passed by Parliament. So, all the indirect tax proposals made by Sinha and which came into effect immediately on February 27, will lapse on May 12 if the budget is not passed by Parliament.

That means all the hikes in the general rate of customs duties, the rationalisation of others, and the changes in excise rules (whether upwards or downwards) will once again become infructuous. So, if a manufacturer hiked (or lowered) the prices of his goods after the budget, come May 12 he will have to lower (or hike) them again. He will, of course, have to repeat the same exercise a few months down the line when a new government presents a new budget. Multiply this by the few lakh enterprises that make goods for sale across the country, and you can imagine the extent of the havoc this will wreak.

Apart from the fact that such turmoil will kill whatever little recoverywe’ve seen in consumer demand — with consumer wealth on the stock market falling sharply, they’ll obviously spend less — this will also spell bad news for investment in the economy, also lagging for the past couple of years. With the stock markets in the doldrums, the amount of funds raised in the primary capital markets by industry also fell dramatically — from a low enough Rs 4,570 crore in 1997-98 to Rs 3,929 crore this year (April to December).

How important this fall in the ability of the private sector to generate funds is, can be seen from the fact that, in the nineties, it is private sector investment which has emerged as the driving force of overall economic growth.

According to a recent presentation by Jairam Ramesh, secretary of the Congress economic think-tank, the private sector contribution to overall investment has gone up from 5.6 per cent of GDP in 1993-94 to 8.4 per cent in 1997-98, while that for the public sector has gone down from 8.1 per cent to 7.1 per cent. But in the heady rushto topple governments, who, including those in the Congress, cares for saner voices?