Storytelling In The News: #151

In India, story of new government causes financial panic

May 16, 2004

Events in India dramatically illustrate the impact of a narrative. In substance, nothing has changed in the Indian economy. The only thing that is different is the story that a new government is taking over shortly. This story however is sufficient to wipe out some 30 percent of the market capitalization of the Indian stock markets in just two days of trading.

The political story

Last week, in the biggest political upset since India gained independence from Britain in 1947, the ruling coalition led by the Bharatiya Janata Party, or BJP, was unseated by a rival alliance led by the chief opposition Congress party of Sonia Gandhi. The BJP had spearheaded the country's economic resurgence over the past six years.

India watchers worry, however, that obstructionists from the left-leaning elements in the new government may slow the reforms that have fueled growth in both the economy and the stock market. India's economy is expanding at a 7% to 8% pace, and its stock market is up 71% over 12 months.

Since the Congress party, led by Sonia Gandhi, beat the BJP in the parliamentary elections last week, Mrs Gandhi has been in talks with allies including the Communist party in forming a coalition government, triggering fears that the new government could sharply slow down the privatisation of state industries in favour of left-leaning policies, such as those on agricultural and social welfare development.

The Communist Party of India (Marxist), which won more than 60 of the parliament's 545 seats, said on Monday it would not formally join Mrs Gandhi's coalition, but would support it from outside, providing investors some relief that share prices might stabilise after trading resumed.

The financial impact of the story

The financial impact of the political story has been massive.

Stock markets were already down down 10.6% last week. Markets continued to plunge on Monday morning on investors' concerns that the new government might slow down the pace of privatisation, prompting regulators to temporarily halt trading across the country.

The Bombay Stock Exchange's benchmark Sensex index opened down 10 per cent on Monday morning. Trading was then halted for one hour but when markets reopened the Sensex tumbled another 15 per cent to a nine-month low of 4282.98, forcing the Securities and Exchange Board of India, the market watchdog, to suspend trading again for another two hours.

About $40bn of market valuation was wiped out in morning's trading and the rupee slid 0.8 per cent against the dollar.

Once the Sensex resumed trading after the second suspension, the index trimmed some of its losses and was down 7.8 per cent at 4,673.73.

The government tries to launch a new story

Manmohan Singh, the architect of India's economic reforms a decade ago and a frontrunner for the job of next finance minister, on Friday night had sought to calm markets by saying: "We are not against disinvestment if it is in the national interest." Mr Singh added that the new government would pursue policies that would lead to growth without ignoring the interests of the common man.

His comments came after a day of hostile remarks about state sell-offs that frightened investors. Nilotpal Basu, leader of the Communist Party of India (Marxist) in the upper house of parliament, said he supported the abolition of the Disinvestment Ministry in favour of a "Ministry for Industrial Rehabilitation".

Jairam Ramesh, a Congress policy adviser, ruled out an "assault on the public sector" of the type rolled out by the outgoing BJP-led government.

India's new Congress-led coalition is still being assembled and its "common minimum programme" has yet to be formally unveiled.

"What we stepped into today was a vacuum," said Andrew Holland, of DSP Merrill Lynch in Mumbai.

Bottom line

Until the story of the new government becomes clearer, the impact on financial markets will continue to be massive.

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