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Elections and the market

By C.P. Chandrasekhar

Market developments since April 27 cannot be explained away as the stray actions of a few unhappy, nervous investors.

THE CLAIM that phase-wise exit polls in a staggered election influence voting behaviour has been hotly contested. But there is little difference of opinion on the effect that such exercises have had on the performance of India's stock markets. On Wednesday, April 27, the Sensex fell by 213 points, wiping clean an estimated Rs.55,000 crores of paper "wealth". This largest single-day decline in over three years was recorded immediately after the exit polls relating to the second phase of polling pointed to a setback for the National Democratic Alliance and pollsters predicted a hung Parliament. Since then, the Sensex has recorded a rise only on three out of eight trading days. Overall, markets remained depressed with the cumulative decline in the Sensex since April 27 amounting to 256 points.

This downturn, "analysts" conclude, has definitely been driven by the exit polls — the most "scientific" of available assessments — that suggest the NDA may not win a majority. In the run up to the elections, India's "upper crust" — consisting of "the markets", the media and large sections of the urban middle class — had convinced itself that the results of the elections were a forgone conclusion: the NDA would form the government, only the margin of victory was a matter for debate. The initial opinion polls only confirmed this belief. However, the exit polls suggest that India's "upper crust" had got it wrong. It had failed to sense the mood of the "other India", which seems unwilling to go along with the celebration of the NDA's rule and policies that the explicit and implicit "India Shining" campaign involved.

A sense of shock among the constituents of the "upper crust" is to be expected. What is surprising, however, is the response of the "markets" — that disembodied representation of finance capital. One feature of post-reform discussions on policy has been the claim that those reforms are irreversible, making the economic policy framework impervious to any changes in the political environment. Governments may come and go, it had been argued, but the reforms are here to stay. Even if that claim is not accepted in full, nobody believes that any coalition which comes to power could dramatically alter the framework of policy: minor shifts in emphasis, a change in the pace of reform, and a small clutch of new initiatives are all that can be expected.

This suggests the "markets" are not so much worried about reversal; rather they are disappointed that expectations of substantial new freedoms and concessions may not materialise. Those expectations had been built during the last five years of NDA rule. The BJP-led NDA Government has been blatantly "market friendly," keen to placate big business and international finance and desperate to resolve its budgetary difficulties by selling some of the most valuable and profitable of public sector assets at extremely attractive prices. The exit polls hold out a threat to the profits those policies help generate and have upset those who people and invest in India's markets. They have for the last five years become attuned to policies that deliver large gains in short periods of time.

The interest in India on the part of international finance that this environment resulted in explains in part the "India Shining" ethos and the confidence in the NDA among the nation's upper crust. The increase in liquidity that capital inflows resulted in triggered a housing finance and consumer credit boom in the non-agricultural sector. Coupled with India's software and outsourcing "mini-revolution," it helped create a booming enclave economy.

Besides those who directly profited from these developments, there were others who were gainers in this new situation. A relatively small group of middle class Indians gained access to better paying service sector jobs. Their incomes and the easy availability of credit finance allowed them to consume a host of commodities that invaded India's shopping malls after liberalisation. In pre-liberalisation India, middle class success depended on entry into government or migration abroad. Now, private sector employment at home promised a taste of the lifestyles that successful migrants led outside the country. The short span of time in which this transformation occurred held out a hope for others, who expected the boom to persist at least till they found themselves a slot in the charmed circle of India's post-liberalisation elite.

Unable to see beyond their own circumstance, these sections that have come to benefit from the new regime did believe that governance in India had changed for the better. If in addition the Opposition was disunited and the Congress in disarray, victory for the NDA seemed inevitable. What was missed was the damage that the NDA Government's policies had done in terms of the worsening livelihoods of the farming community, the displacement of already employed workers, the fall in the rate of generation of new employment opportunities, the increases in the cost and decline in the availability and quality of public services, and the collapse of the small business economy. The losers inhabiting this large universe, the other India, could be voting against the NDA even if not for the Opposition, if the exit polls are right. When the NDA came to power the perceived danger was a widening communal divide, which has indeed materialised and marginalised the minorities. What was not expected to the same degree was the widening economic divide, which has remained relatively unnoticed but is becoming visible as the exercise of winning the voter has proceeded.

With evidence now that this divide threatens to dislodge the NDA, the market has declared its displeasure with actions that not only erode the wealth of its own constituents but, through their impact on credit and foreign exchange markets, threaten a crisis in India's liberalised financial sector. Market developments since April 27 cannot be explained away as the stray actions of a few unhappy, nervous investors. The herd instinct, so typical of financial markets and especially of foreign institutional investors, has resulted in concerted action that threatens a sharp decline. And in India's markets, which are neither wide nor deep, a small herd can make a big difference.

On the surface, an early correction of the baseless expectations of a few financial investors should not be cause for worry. Nobody can demonstrate that India's till-quite-recently inactive financial markets drive the economy. However the problem is that the crises that such changed expectations resulted in elsewhere in East Asia, Latin America, Eastern Europe and Turkey show that they tend to damage the real economy as well. Moreover, when the crisis of finance becomes a crisis of the real economy, its burden falls disproportionately on the poor and the lower middle classes, even though they do not participate in or often are not even conscious of the workings of financial markets. Having invited foreign financial investors into their economies, countries find that ignoring their sentiments and/or closing the door on them when they retreat, involves painful adjustments that the people, and therefore democratic governments, find hard to face up to.

This feature of the play of fluid finance has become a source of power for financial interests. We only need to recall the financial drama that preoccupied Brazil as it became clear that Lula and his Workers' Party would win the polls in 2002 and financial capital openly expressed its resentment over that prospect. To prevent fear of a crisis from changing the electoral result, Lula had not merely to promise to refrain from doing anything that would upset international finance, but also, after his victory, implement a substantially diluted and pared down version of his original manifesto.

The situation in India since the last week of April is similar. By threatening a pullout from financial markets if expectations of an NDA victory are not realised those who sway those markets, especially international financial investors, are sending out two signals. First, they are signalling the electorate that any outcome that is not in keeping with the expectations of finance and the "upper crust" can be damaging for all. Second, they are signalling any possible formation other than the NDA that may in fact come to power after the elections, that statements and policies that displease finance could be suicidal.

The message is clear. Even if policies that please finance and industrial capital make it difficult for those who pursue them to remain in power, those policies must remain in place. What matters is the success of the enclave that liberalisation generates, not the well being of the rest who must be coerced into voting for governments and policies that surrender sovereignty at their expense. The exit polls suggest that the "other," predominant India may be unwilling to submit to these authoritarian ambitions of finance capital.

(The writer is a Professor in economics at the Jawaharlal Nehru University, New Delhi.)

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