Stock market bubble will burst soon: CPM

Cautioning that the rise of the Sensex is irrational for it does not take into account all the adversities the Indian economy is facing, the CPI(M) has warned that the "stock market boom" is merely a bubble and that the market can crash any time.

In the latest issue of the party organ, People's Democracy, not only has the CPI(M) warned against the role of foreign institutional investors (FIIs), whose activities have no bearing on natural calamities like floods in Mumbai, but has also said the objective conditions in India do not merit such a behaviour by the stock market.

The party has warned that India must be wary of being manipulated by the same forces that caused the Southeast Asian crash in 1997-98.

The party argues that excepting for services, both manufacturing (other than some select sectors like automobile and ancillaries, and textiles) and agriculture are languishing with the latter declared to be in a crisis mode. There is a threat of decrease in food production.

"And all those who matter, including the finance minister, admit that the projected growth rate will not be attained," the party says.

It also, somewhat unexpectedly quoting The Economist, cites the Asian Development Bank warning that the continued rise in oil prices could shave two percentage points off the growth rate in several developing countries.

The party quotes the Federation of Indian Chambers of Commerce and Industry, as saying that the oil price hike will cost an "additional outflow of Rs 55,520 crore or $12.8 billion" that will "more than gobble up the additional export income of $8 billion targeted".

But, the party maintains that the biggest danger to the Indian stock market is represented by FIIs. It notes that 2004-05 saw the registration of more FIIs than ever before.

"Indian institutional and retail investors have little to do with the stock market boom. It is the FIIs that kept the stock market up even when small and medium businesses were destroyed in the Mumbai floods recently. This was artificial," it says.

The party quotes secondary market investment data published by the Centre for Monitoring Indian Economy that shows FIIs involvement in equities rather than debts. "Their concentration on both buying and selling, is the very grain of speculation. This is what makes for the volatility of the stock market," the party says.

The party says FIIs are coming to India because of increased financial liquidity, accompanied by shrinking investment avenues in the developed countries. As the stock market is irrational, it is dangerous to invest people's money in it.

"The experience of the United Airlines in the US that switched over from investing pension funds in bonds to stocks gives a sordid example of what would happen if people's savings are ploughed into the stock markets," the party says.

Warning India to be vigilant, the party says the present stock market euphoria is deceptive. It charges that the FIIs are manipulating the stock markets and reminds investors of India's own history of market crashes.