Sensex: Crash lessons

Instead of trying to time volatile markets, government must frame a longer-term blueprint on disinvestment

By: Express News Service | Updated: February 12, 2016 12:00:16 am

Apart from wiping away enormous amounts of wealth, the stock market collapse across the world on Thursday signified that gloomier days may yet follow on the economic growth front. Benchmark indices in Britain, Germany and France have shed 3 to 4 per cent of their value. Even India, seen as a beacon of stability, witnessed a bloodbath. The BSE Sensex fell over 800 points (down 3.4 per cent) while the broader NSE Nifty slipped 240 points (down 3.3 per cent). Both the domestic indices are now trading at a level seen before the Narendra Modi government took over in May 2014. Incidentally, it was almost exactly a year ago, in late January 2015, that the Sensex closed at an all-time high. The current slide is broad-based, with all sectoral indices, such as BSE Realty and BSE Utilities, closing in the negative. Beyond the immediate impact, a significant consequence of this carnage in the markets is the derailing of the government’s disinvestment strategy.

It would be convenient to blame global cues but domestic factors have had a large role to play in the current decline. The growing stress in the banking sector is a case in point. The State Bank of India, the country’s largest bank, disappointed markets when it reported a 62 per cent fall in profits for the December quarter. Much like the rest of the banks, the fall was on account of the provisioning required for increased levels of NPAs. While stock market performance is not a comprehensive measure of an economy’s fundamental strength, market movements do act as a bellwether for the prevailing sentiment. For instance, apart from the foreign institutional investors who have already pulled out significantly from the Indian markets, even domestic investors’ interest has fallen sharply over the last two months.

In other words, buyers are leaving the market. This cannot be good news for India’s annual disinvestment target, which has been missed far more often since the process started in the early 1990s. Even in the current year, the disinvestment proceeds are just about one-fifth of the targeted amount. Failure to raise funds from disinvestment matters all the more this year since the government is likely to miss its fiscal deficit target, not just for the current year but also for the next. And with nominal growth rates falling to a 13-year low, the prospects of revenue collections are also tepid. What should the government do? Ideally, it should take this opportunity to step back and come out with a blueprint of public investment. The volatility of the past year has shown that it is difficult to time the market. The wiser option is to think long-term.

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