Any crisis creates demands for quick action. But quick action should not mean poorly thought-out steps, or decisions driven by unrelated agendas—like the government’s reported proposal to ease the rules for special economic zones, which must surely be a lobby-driven proposal designed to take advantage of a crisis-ridden environment in which action takes precedence over proper debate. Meanwhile, the government’s decision to open up to external commercial borrowings with fewer safeguards than earlier, is an example of a potentially damaging decision being taken in great haste and with perhaps little debate. Anyone with a decade-long memory will recall that it was the arbitrage game played by companies in Thailand and South Korea (borrowing overseas in order to take advantage of lower interest rates, without a thought for the currency risk) that made so many companies in those countries go belly up when the “Asian virus” spread. If Indian companies now make the same mistake, and have no dollar income streams that offer a natural hedge against currency risk, then the hunt for liquidity is going to lead them into potentially dangerous waters.
Also, perhaps it was not a great idea to open up on participatory notes a few weeks ago (reversing a decision taken earlier), at a time when it is more important than ever to ‘know your customer’? The argument in favour of the reversal was that some futures trading had shifted to Singapore and it was necessary to undo the damage. Quite apart from the fact that those using the Singapore market are unlikely to switch to India, the subsequent move against stock lending by foreign investors who issue participatory notes suggests that matters may not have been thought through fully.
A seemingly more attractive proposal is to have a government-funded body buy under-priced shares on the market, to sell them later at a profit. This is a variant of what has been proposed in the US and UK—buy equity in banks, or troubled assets, in order to stabilise markets now and make a profit later. The trouble with this is the history of government-financed investment organisations in this country—remember the Unit Trust bankruptcy, and the way in which state-owned financial bodies have been encouraged to buy the shares of favoured businessmen. The Mundhra scandal of the 1950s was precisely such an episode half a century ago, leading to the resignation of the then finance minister, and there have been many more since even though they did not catch Parliament’s attention. The government has also frequently leaned on organisations like Life Insurance Corporation to shore up falling stock markets, so this is a long-established covert practice that is now sought to be brought out into the open. That the proposal is being promoted by people who are believers in market logic only goes to show how quickly the idea of state intervention in markets has come to be accepted as the normal thing to do.