China does not like a strong PM Modi and wants his popularity to diminish among the masses. Border skirmishes and market sell-offs are just two tools to create social unrest. All of Chidambaram’s speeches must be studied closely, especially those where he talks about stock markets.
Mumbai: What is the link between former Finance Minister P. Chidambaram’s constant ranting against Prime Minister Narendra Modi’s mega economic package, stock market crash and the resurgence of China’s skirmishes on India’s border in the month of May? The two share a common goal, which is to distort the narrative about India’s rise, spoil the mood over PM Modi’s soothing economic aid to the masses and hence keep both business and social sentiments in the country anaemic. The scenario unravels by examining the mystery of the recent stock market crash, especially in May.
On 18 May, a Monday, the Nifty and Sensex index crashed by 3.5%, just a day after Finance Minister Nirmala Sitharaman announced opening of the economy. The 18 May crash was special. Same day of the month over a decade ago, the mood in the markets was extremely buoyant. Nifty and Sensex had hit their 20% upper circuit as UPA-2 had returned to power in 2009. Then too, it was a Monday and markets had to be shut for trading due to upper circuit on the back of election results announced on Sunday. But this Monday of May has turned out to be a black-day for the Indian stock markets, even when there was calm globally. In fact, stock markets in the United States and Europe rose nearly 2% that day. If India was suffering due to lockdown, so was the world.
A story published in the Business Line on 18 May said that the foreign portfolio investors (FPIs) had stepped up their selling in India since Prime Minister Narendra Modi announced a Rs 20-lakh crore economic package on 12 May. “At around noon on Tuesday, there were media news flashes on an address by the PM at 8 pm. Since then, FPIs have not been net buyers in the market for a single trading session, data show,” the story said.
In just four trading sessions since PM Modi made the announcement, the Nifty index crashed by 5.6% from the 12 May highs, as FPIs were constant sellers. The Bank Nifty crashed by nearly 7.15% during the same time. After Monday’s crash, the Nifty was down 8% and Bank Nifty by around 14% and there were no signs of recovery. Between 12 May and 22 May, FPI selling in the cash segment alone stood at Rs 10,893 crore. FPI net selling for May so far in index futures has been Rs 3,674 crore and same in stock futures stood at Rs 5,885. 85 crore.
What has gone so wrong with India since 12 May, that FPIs went on a selling spree, when globally there was no such pressure on markets? If it is about the Covid-19 lockdown, India still stands out in terms that it has managed the crisis well and saw the least number of deaths compared to other less populated countries. India has not even seen a runaway rally in April and underperformed the global markets for it to warrant such a massive sell-off.
MORE REFORMS UNDER MODI THAN UNDER RAO
Was the economic package a dud? No. In fact, the package has made Manmohan Singh’s 1991 budget announcements look puny. India’s has am agri market that is worth Rs 15 lakh crore annually. For the first time, after the Mughals and British left India, there is a government which is willing to listen to the farmers. The foreign rulers wanted Indian farmers to grow opium and hence they put all sorts of restrictions to discourage them from selling their core agri products. Even 70 years after Independence, such restrictions continued thus far. The Modi government has only now lifted these Mughal and British era restrictions on farmers. They relate to amending the Essential Commodities Act (ECA) of 1955, bringing a Central legislation to allow farmers to sell their produce to anyone, outside the APMC Mandi yard, and having barrier-free inter-state trade and creating a legal framework for contract farming. This will enable the buyer to assure purchase price to the farmer at the time of sowing itself. The move is a gargantuan step in freeing India’s agri market from the clutches of the middlemen as it gives farmers the option to choose the market where they want to sell their produce by removing inter-state trade barriers and providing e-trading of agriculture produce.
India is the largest exporter of rice globally and second-largest producer of wheat and rice after China. But the country’s legal framework so far discouraged private sector investment in warehousing. It put stock limits on any trader, processor or exporter. When farmers brought their produce to the market after the harvest, there was a glut and due to lack of storage facilities they did not get desired price. All this will now be streamlined as government has encouraged private investments in storage facility and allowed farmers to sell to anyone outside the APMC yard. It will bring greater competition amongst buyers, lower the mandi fee, commission for middlemen and reduce other cess that the states impose on APMC market. For the consumers, food inflation will remain under check.
In 1991, Manmohan Singh had announced a reduction in import tariffs, deregulation of stock markets for greater foreign flow of money into them and reduction of taxes. It was Singh’s announcement of allowing FII flows into stock markets that lifted the mood on the street. Sensex rose following the budget speech of Singh then, the media went gaga over it and the announcements were hailed as unparalleled reforms. Comparatively, Modi’s package is way ahead if liberalisation was the buzzword that the stock markets and the news media grabbed from Singh’s speech then, but did not do it now. Instead of giving tax breaks to the satta market in Mumbai’s derivative market on the National Stock Exchange (NSE), Modi chose to distribute much of his economic package among the real workers in the economy. The government has given its sovereign guarantee to loans granted to small and medium enterprises this year. This will ensure that small business and workers get loan, bank their credit off-take and yet they don’t face NPAs, which is more of a corporate phenomena. Modi does not believe in giving money to people to buy cars in the city but distributed income among farmers and working class. That said, he already has announced a slew of corporate and individual tax cuts following the 2019 election victory. Modi-2 government has done far more reforms than what was witnessed by markets in 1991.
Finance Minister Nirmala Sitharaman said that the package included Rs 8.01 lakh crore liquidity measures announced by the Reserve Bank of India, which will ensure that stress reduces on banks. It further included Rs 1.92 lakh crore worth of free food, grains, cooking gas and direct cash transfers to certain sections of the poor in India. The package gave Rs 5.94 lakh crore in the first tranche as credit facility to small businesses and interest subvention of loans. She announced Rs 10,000 crore funds for Food Micro Enterprises, which will benefit 2 lakh micro enterprises/startups. The government and RBI have repeatedly said that they will not allow any private or government banks to collapse. This was evident in Yes Bank case, where its depositors money was safe. If one argues that bond holders were not safeguarded, there are lot of questions on who the real bond holders were. For instance, an NBFC IndiaBulls that raises money at more than 12-14% in market, had invested huge money in Yes Bank bonds that yielded it lower than its cost of fund. Why? It is these investors, with questionable deals, who the government did not intend to save.
Talking about FDI, the package opened up more room in defence, coal minerals, air space management, airports, MRO, distribution companies in UTs, space sector and atomic energy. In defence FDI is now 74% through the automatic route, meaning companies do not require any special permission from government for foreign holding up to that limit. All this, with the money being distributed directly to the weaker section by the Modi government, makes the 1991 reforms look bleak, which was all about giving stock market stimulus. This time too, stock markets were expecting a cut in long term capital gains tax. But why is it necessary? Why should we allow tax free money to flow out via satta? Otherwise, has the domestic investor ever earned in derivative satta?
WHY DID MARKETS FALL IN SPITE OF REFORMS?
Coming back to the answer as to why markets fell despite ground breaking reforms and effective tackling of the black-swan event Covid-19 by the Modi government, is in knowing who the FPIs were who stepped up selling. But first, we must understand as to what purpose market selling serves. A crash like we saw in May often spoils the business sentiment in the country among large banks and corporate houses, which in turn vitiates the job scenario. This percolates down to the social fabric and creates unrest in society. For instance, even as the Modi government is opening up India’s agri economy, an agri warehouse management company, NCML, has asked several junior staff in Mumbai to resign. The warehouse was started by government promoted banks, which are still its shareholders. But the majority of the stake has been picked up by foreign fund. Retrenching of junior staff is now being done in the time of crises. Sources say no senior high salaried top management has taken a pay cut but the axe fell on junior and several young team members. Leaders of the same foreign fund have often talked about creating jobs in India to draw Modi’s attention. Since the market is crashing, social media posts being moved are utterly negative with regard to the package announcement. Several memos about PM Modi were circulated on WhatsApp groups. These are the ways to bring seminal changes on the social front. This orchestrated activity kept the mood negative towards the government. A few Opposition leaders such as Chidambaram know how to grab such an opportunity to abuse and discredit the good work done by the Modi government. After all, he has been a pioneer of keeping the sentiment high by stock market management even though the UPA survived from one scam to another. Between 2004 and 2014, Chidambaram and his FPI friends ensured that markets remained buoyant, which was evident when Sensex and Nifty hit the upper circuit on 18 May 2009. Chidambaram’s nexus with FPIs warrant an investigation that so far agencies technically under PM Modi have not done. Also, they need to find out the Chinese funds selling in India heavily and creating trouble for the Modi government so that market and business sentiment remains weak.
Several media reports suggest how Chinese funds that manage $1 billion or more have set up operations in Hong Kong, which serves as a launch pad for mainland managers seeking access to overseas market. The bulk of the investments from Hong Kong, in turn, are routed through tax havens including Singapore to India, which have historically been an attractive jurisdiction for Asia-focused funds. Also, why has China again started creating a tense situation at the border? How does the Chidambaram network try to take benefit from the situation? Singapore and Hong Kong have strong China links, given that ethnic Chinese make up an estimated three-fourths of its citizen population. This could make it harder to determine if the beneficiaries of FPIs playing in India are actually Chinese. Ireland and Luxembourg, by way of being popular offshore fund jurisdictions, also attract sizeable Chinese money. Currently, there are 16 FPIs from China registered in India and 15 of them hold Category-I licence. But hundreds of them are registered in Cayman, Mauritius, Singapore, Luxembourg and Ireland among other tax havens. China fears that India will dominate the narrative globally after the Wuhan-virus crises and especially it fears Modi even more after the country will have the President’s chair of World Health Organisation (WHO). China does not like a strong Modi at home and wants his popularity to diminish among the masses. Border skirmishes and market sell-offs are just two tools to create social unrest. All of Chidambaram’s speeches must be studied closely, especially those where he talks about stock markets. Why agencies are sleeping at the wheel when it comes to such matters of concern for the economy is for them to explain.
The writer has been a financial market journalist of long standing.