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Tuesday, May 18, 2004

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The Monday mayhem

THE STOCK MARKET meltdown second trading day running suggests that while the voting public may have reposed their faith in a Congress-Left ruling alliance at the Centre, investors clearly do not share this enthusiasm and are, if anything, extremely nervous about the future earnings prospects. Only events, as they unfold, will reveal whether their anxieties on this score are misplaced. But, as things stand now, they cannot be faulted on their response. The near-term outlook is definitely clouded from their perspective.

Take the case of foreign institutional investors. Whatever one's ideological preferences, there is little doubt that they have played a crucial role in catalysing improved public confidence in the stock market. Their role would be crucial in sustaining the current sense of the `feel good' in the market if not actually improve on it. But the prospects for significant fresh FII inflows are none too bright at the moment. For a variety of reasons there has been a tendency among them to retreat to the safe haven of the US market. But this would not have mattered much had the Indian stock market offered attractive opportunities for short-term profits from the ownership restructuring of public enterprises. With the Left categorically ruling out any fresh round of disinvestment in profit-making PSUs and the Congress too appearing to largely toe this line, ownership restructuring in public enterprise can for all practical purposes be ruled out now. To compound matters little headroom is available in most blue-chip stocks for this class of investors to take fresh exposure. It is unlikely that the FIIs would be pumping in large sums into the limited pool of such stocks and push valuation to even dizzier heights than what they were before the recent meltdown. If domestic investors see no prospect of fresh inflows from their foreign counterparts, they may have no interest in `front running' an exposure into potential candidates of overseas interest and push prices of such stocks, or the market in general.

But far more than the speculation on a halt to the disinvestment programme what would scare the investor community is all this loose talk of a massive hike in public outlays on agriculture and programmes catering to the disadvantaged. There can be no two opinions on the need to improve the productivity of Indian agriculture or give a leg-up to the poorer sections through meaningful programmes of public intervention. But the question is where is the money going to come from? Few people believe that any Government can achieve significant reduction in wasteful expenditure or that tax evasion can be curbed through more efficient administration. In the event, if their promises have to be taken seriously then a fresh dose of taxation appears inevitable. Any real proof of the incoming government's pious intentions can only be had from the Budget that should be presented to Parliament in a month's time. Till then it is difficult to see how the market will be satisfied with promises or be otherwise dissuaded by threats of punitive action from its natural inclination to drive prices down.

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The Monday mayhem


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