Economic Highlights
New Delhi, 16 October 2008
Mutual Funds Take
Brunt
DELINK ECONOMY FROM
STOCK MARKET
By Shivaji Sarkar
The Reserve Bank-injected liquidity of Rs 1,00,000 crore
through cash reserve ratio (CRR) cut is a tacit admission that the Indian
financial sector is not as secure as it is claimed to be. It also bursts the
myth that the stock market is the mirror of the economy.
Importantly, it raises a basic question whether the RBI is
correct in its decision on CRR. The economy and not just the market need relief
from the high interest rates. That is what the RBI should have done instead.
The financial instrument linked to the stock market – mutual
funds (MF) – has once again taken the brunt of the hit. It is not the first
time that the stock market has burnt the Indian economy. It has done so many
times during the past 15 years in scams such as Harshad Mehta’s (Rs 90,000
crore), Ketan Parekh’s (Rs 30,000 crore) and the UTI, a mutual fund in reality
(Rs 64,000 crore).
Mutual funds, mostly floated by banks or financial
institutions, play on the small investors’ money. The losses of 35 MFs at the
stock market are being computed and some estimates suggest that these are likely
to suck in all the liquidity that the CRR cut has induced. In fact, the high-level
committee set up by the Central government was engrossed with the problem in
its very first meeting and soon after arranged Rs 20,000 crore to bail the MFs
on a short-term basis. Dhirendra Kumar, CEO of Value Research, and an expert on
mutual funds, says investors are pulling out their money from MFs and warns
that the latter may need Rs 1,00,000 crore to resuscitate.
Besides, the market is agog that the banks have taken out 80
per cent of their investment from mutual funds. The pull out of the giants is clearly
shaking the confidence of smaller investors, who too have started taking out
their money, lest they lose the principal amount as well. In one month alone,
the MFs asset value has been reduced by over Rs 15,000 crore – from Rs 544,000
crore to Rs 529,000 crore. This indicates the exit of investment and does not
take into account the actual losses.
The way the Union government is trying to bail out the MFs –
an extension of the US
bail out package – strengthens the belief of privatization of profits and
socialization of losses. It is no wonder that French President Nicolai Sarkozi,
in his comment on the global meltdown, says, “The idea that market was always
right was a mad idea.” He goes on to add that “The crisis marked the end of a
world that was built on the fall of Berlin Wall and the end of Cold war – big
dream of liberty and prosperity”.
The scrip at the stock market is as unreal as the sub-prime
real estate prices. Both have far over-rated their intrinsic prices, leading to
an inflated credit market. In reality, high credit is given on low value
instruments. It adds to artificial money circulation, while actually there is
no money.
The speculative prices and linked-up credit do not add to either
the national or global wealth but to the bubble of speculative prices. No
wonder the bubble bursts repeatedly but the financial sector, which is based on
greed, quick profits and not so ethical practices, refuses to learn its
lessons.
Sarkozi’s remark is a grim warning for all economies. It
should be taken as a call to delink the world economy from the stock market led
“boom”. At least, India
needs to take the remark seriously. The financial regulator, RBI, needs to
issue strong instructions to the financial sector that they should keep off
from the stock market.
Stocks or equities are company properties, held by private
interests profiting on large public investments. It is for this reason that when
the stock market burns, the companies rarely shed tears as their intrinsic
basic investment is always safe. The losses are accrued to the public, who are sold
the scrips on dreams of, as Sarkozy says, “prosperity”. It may be recalled that
the Great Depression of 1929 also started from the New York Stock Exchange.
The International Monetary Fund (IMF), in its latest (October
8) economic outlook, also supports Sarkozi’s view. It says: “The world economy is entering a
major downturn due to the most dangerous shock in mature financial markets
(read stock market) since 1930s”. The IMF not only predicts a fall in the US and European growth to below zero per cent
but issues a warning about the slowing down of the “fastest growing” economies
of India and China. The
global growth is to fall to 3 per cent from 5 per cent in 2007.
The silver lining, however is that despite problems, the IMF
hopes to see both India and China do better
than the western countries. It does expect a thaw. And, this should be utilised
for reworking the financial policies linked to the market so that the losses
are not socialized. The knee-jerk reaction to bail out MFs -- indirectly the stock
market - seems to belie that hope.
Since 1991, all the so-called reforms have been addressed to
the stock market. This has skewed the bank-financing pattern. The entire
financial market’s obsession for quick profits through stock market investments
has not only added to huge losses, but has kept the investments away from
sectors that need the money, such as infrastructure and industrial growth.
The impact is being seen as in low growth in every sector –
manufacturing, core sector, industry, services and finance. Industrial indices
like IIP were fine tools when they projected 10 per cent growth, but are being
maligned and termed incorrect by the top bosses, when these fall to a low of
one per cent. This is clearly an ostrich-like policy—a refusal to accept the
reality, possibly under the pressure of stock players and corporate lobbies. Importantly,
this is where policy correction is required.
A law should be enacted to prevent the government from
giving such bail-out packages. It only means rewarding the bad players, if not
criminals, and penalizing the good and honest investors. It also calls for a
review of regulators such as the Securities and Exchange Board of India (SEBI),
which has repeatedly failed. The present step, CRR cut, does not address the
real issues. The nation has to debate and look for the corrective path – away
from the stock market. ---INFA
(Copyright,
India News and Feature Alliance)
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