Let's get perspective

The markets have done a reality check, nothing more

Let's get some perspective on what has really happened in Indian markets. India's main stock indices are now about 10 per cent lower than the highest levels reached (however briefly) in the last five years. Meanwhile, the rupee has fallen against the dollar since January, from about Rs 55 to about Rs 65. These twin developments have prompted media headlines like "free fall" and "panic". The rupee has been the weakest currency this year, commentators have said, forgetting that it was unjustifiably strong for years and that, viewed properly in a longer time context, the currency has done no worse than what one should expect. If the drop in value has been sudden, that is all to the good - a slow decline dragged out over months would have created far too much uncertainty. In any case, currency movements are often stochastic. If the fall is excessive, the rupee will bounce back. By exaggerating these events with hyperbole, an atmosphere has been built up as though everything is collapsing around our ears.

For perspective, take the Asian crisis of 1997-98, when the Thai baht dropped from 25 to the dollar in June to 56 the following January (and then bounced back). The Thai stock market did worse, dropping 75 per cent. Meanwhile, the Indonesian rupiah dropped from 2,600 per dollar to 14,000, and GDP shrank by a seventh that year. The Suharto government fell, and there was political chaos and rioting, including attacks on local Chinese businessmen, an ethnic minority. Or consider what happened in the Philippines. The country's central bank more than doubled the overnight rate, to 32 per cent, and the peso fell 37 per cent - matched by Malaysia's ringgit, even as Kuala Lumpur raised the overnight rate to 40 per cent. Meanwhile, for South Korea, Moody's announced a double downgrade, and followed it up with a second double downgrade; the won halved in value. All economies in the region shrank that year or the next, while India's should grow this year by at least four per cent. What Indian markets have been through this year is a picnic, in comparison not just with the Asian crisis but also the Sensex's own history, which (let us not forget) includes the first United Progressive Alliance government's opening bell for the market: a 12 per cent fall on a single day in May 2004.

This is not to minimise the macro- and meso-economic problems confronting the economy. The current account problem remains (though the lower rupee should help to contain it), and the fiscal deficit is high. The rupee fall will increase the oil subsidy and add to inflation, which is already outside the comfort zone. A slowing economy will mean lower tax revenues, thus compounding fiscal worries. The lower rupee will also create headaches for companies that have borrowed abroad without properly hedging their positions, and bad loans will colour bank balance sheets. These fiscal, financial and corporate worries add to a cornucopia of issues that have resisted solution, like iron ore exports that are stopped and coal production that should be higher in order to reduce imports.

What has happened on the markets has dominated the headlines but they are not the problems, merely the symptoms. The rupee fall is mostly a corrective; the fall in stock prices reflects corporate stress and lower growth expectations. In neither case has the sky fallen on our heads. More serious market shocks may come, if India suffers a credit downgrade and/or if the US Federal Reserve announces its "taper". The important thing is to focus on the job at hand, and to undo the macro- and meso-economic mismanagement that has been the hallmark of UPA-II. The markets will then take care of themselves.