Setting a floor

Yesterday was the first anniversary of the Indian stock market's "black Monday", May 17, 2004, when the BSE Sensex dropped over 800 points during the trading day before closing some 500 points below the opening value of 5021.

The NSE Nifty dropped almost 200 points, 12.3 per cent, that day. This was, in many ways, a defining moment for the new government.

Uncertainties about the composition of the coalition and the ideological direction it would take compounded the impact of the defeat of a government perceived to be market-friendly.

For people who saw the emergence of a Left-dominated coalition as an unmitigated disaster for reforms, the depths that market sentiments plunged to that day provided grim vindication.

But life went on, the UPA government was formed, two Budgets and a number of other policy announcements have been made.

One year down the road, the BSE Sensex closed at 6528, 45 per cent above its black Monday finish, as did the NSE Nifty.

Clearly, the markets have overcome their early nervousness about the new government and seem to be comfortable with the economic environment as it has emerged during its first year.

One could argue the counter-factual, of course; the indices would be even higher if a different formation were to be in office, or that the buoyancy is simply a reflection of a global appetite for emerging markets.

But that would be quite unfair to the government. The most reasonable interpretation of this relatively good one-year return on the market portfolio is that the initial fears of reversal of reforms and re-orientation of the policy direction proved to be unfounded.

The market panic a year ago was set off by some comments made to TV channels by a couple of communists. They have continued making similar comments through the year, even as the government has gone about its business.

Nor has the influence of the Left affected the general buoyancy in the economy, which it might be argued has faced an altogether different problem in the high crude prices.

Indeed, the sterling performance shown by the corporate sector and the evidence of strong business confidence as well as resurgent consumer demand emphasise that there is genuine momentum to the India story.

Yes, emerging markets in general did pretty well during this past year. But, importantly, the government did not do anything that either hindered the buoyancy or made investment in India less palatable than any of its peers in the emerging markets portfolio.

One should give credit to Manmohan Singh's government for that. Unexpected political change is no reason for the reforms roadmap to be abandoned.

Neither does such change appear to harm the short-term performance of the economy. That may well be the most significant lesson from the many changes in government the country has seen over the last decade.