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Turbulent days ahead

Early this week, as election results began to indicate that a Bharatiya Janata Party-led alliance was set to form government, I bumped into one of the biggest brokers on the stock market.

Often credited with the vertical rise of a dozen-odd stocks, he made just the sort of statement that confirms his big league status. When I asked him if he was issuing trading orders late in the evening over the cell phone stuck to his ear, he replied, "I am not in the market even during trading hours these days."

The Sensex had just touched 5000 before turning coy about its new status, but the Big Broker said something like, "You ain't seen nothin' yet." The market, he said was going to move into another orbit altogether. A new bull run was just about to start. But events dictated otherwise.

Things seemed to get better the next day. Prime Minister Atal Bihari Vajpayee did not make the mistake of trying to replace Yashwant Sinha as finance minister and though he created a jumbo CCabinet, it left little room for anybody of consequence to sulk. But the market, temperamental as ever, decided to throw a spanner in the rally.

General Pervez Musharraf's coup provided a much needed break to what could have been a crazy rally which would undoubtedly have lured small investors and speculators into making ill-judged investments. In the long run, it may prove to be the thing that saved the market. The coup in Pakistan has forced large investors, both Indian and foreign, to remain forever watchful for developments in that country and will act as a break to irrational exuberance.

A Pakistani military smarting from the defeat at Kargil is always a threat to India's security. There is the unease about its nuclear capability, the fear of more Indian lives being sacrificed in a mindless war and economic implications of the huge increase in defense spending that will be certainly be necessary.

At the same time the timing of Pakistan's military coup has considerably enhanced India's image. As India's vibrant democracy survived three years of instability and installed yet another legitimately elected coalition government, Pakistan was shedding the fiction of its democracy which had always survived at the pleasure of its powerful military.

More importantly, the re-installation of Atal Bihari Vajpayee as prime minister also sent out the message that the Indian electorate does not take kindly to political machinations that had pulled down his government by a solitary vote. It would be interesting to see whether the USA and other developed nations would still insist on equating the two countries on major international issues.

Though the market has recovered a little, the drop of 191 points on Friday (October 15, 1999) indicates the extreme fragility of the incredible valuations in the glamour stocks of the pharmaceutical and software industries. A mere indication by the Securities and Exchange Board of India that it may be forced to increase margins to curb volatility and restore sanity led to a seven per cent drop in the favourite stocks of the broker mentioned above.

Leading the drop were Ranbaxy and Zee Telefilms -- two scrips which demonstrate how a broker often gets carried away with the image of his power to dictate price movements. Flash back if you please to Harshad Mehta's birthday celebration in 1992 by taking the ACC scrip to an astonishing Rs 10,000.

Market operators confess that the broker alone cannot be blamed for the irrational stock prices - there are just too many punters who want to piggy back on these stocks, confident that they can punch in their exit before the broker loses interest in the scrip. Often they end up losing their shirts or burning their fingers.

The 191-point drop in prices on Friday was triggered by such fast-fingered operators who are jittery about the huge amount of illegal badla that is going on around the country and off-market transactions that could trigger panic. Moreover, unless the first day rhetoric of the newly appointed ministers is actually converted into positive decision making, moving the Sensex into a new orbit could be a huge mistake.

Clearing some pending legislation such as the Insurance Bill may be fairly easy, but let's look at possible roadblocks. The first one is clearly the transport strike over the hike in diesel prices. One needs to watch how the government handles that one.

The privatisation of Public Sector Undertakings will probably be the next issue. Divestment Commission Chairman G V Ramakrishna has quit; but even when the Commission was around and active, decisions on divestment were dictated more by the expediency of reducing the fiscal deficit rather than the best interest of the PSUs. Ramakrishna and Industry-cum-Commerce Minister Murasoli Maran had several differences and verbal duels the last time that Maran was industry minister.

The question now is whether the Divestment Commission's reports painstakingly produced and largely acceptable to everybody but the ministries who do not want to release their control over these companies, are implemented or mothballed. Also, it is one thing for Yashwant Sinha to talk boldly about privatisation but to put in place a divestment programme which realises the correct value for public sector companies will require the concurrence of the industry minister, that of Manohar Joshi, who is in charge of public enterprises, and the fourth power centre which is the Prime Minister's Office.

The third problem area is the financial sector. Having handed over Rs 4,800 crores to bail out the Unit Trust of India last year, it remains to be seen whether the finance minister is willing to hand over another Rs 5,500 crores to recapitalise Indian Bank, United Commercial Bank and the United Bank of India. The M S Varma Committee fights shy of hard and permanent solutions to the problem of weak nationalised banks.

It is here that Yashwant Sinha's boldness in pushing ahead with privatisation will really be tested. If he takes the easy route of a bail out with these banks then there are at least half a dozen potentially loss-making banks and institutions which will immediately line up for assistance.

In a year when the defence budget is expected to shoot up, particularly with the military regime in Pakistan and when hard and unpalatable economic decisions are called for, it would be sensible for investors to be cautious until they see real action. The problem of trying to resolve the dilemma of whether to follow brokers who predict a new orbit rally or to remain wary about promises of an economic revival take the form of an extremely volatile market -- investors will simply have to live with it until a clearer picture emerges.

Sucheta Dalal

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