Kanika Datta: Two decades of transition

SWOT

October 19, 1987, saw the largest one-day crash in stock market history when the Dow lost 22.6 per cent of its value, roughly equivalent to $500 billion. Within days, the FTSE, Nikkei, and Hang Seng also tumbled and the repercussions were felt in Australia and Canada. In the offices of Business Standard, then headquartered in Calcutta, these developments were watched with deep academic interest but little comprehension. A low-key report went on the front page and some token coverage followed on the inside pages.

The principal problem was to find someone in India who understood global capital markets and could explain to readers what was going on. (Twenty years on, it is almost reassuring to review the history and read that even global pundits weren't sure what precisely went wrong.)

In India in those days, snug behind protectionist barriers, the stock market remained serenely untroubled by the global meltdown. True, Indian bourses, spurred by Rajiv Gandhi's partial liberalisation, may have started attracting more domestic interest, but they were still very much a cosy cabal, hedged in by stringent currency flow restrictions. "Black Monday", as the 1987 global stock market crash was called, had scant repercussion on the newly-created Bombay Stock Exchange's 30-stock Sensex. The usual blue-chip suspects""Hindustan Motor, Tisco (as it was called then), Reliance, CESC, and ITC""continued to flourish. The pro-protectionists praised our closed economy for insulating the country against such rogue influences.

In 1997, just ten years later, the Asian financial crisis made its presence felt in India, but far less emphatically than other south-east Asian economies. Again, it was India's relatively closed economy, capital controls and an indifferent export performance""just 8 per cent of GDP at the time, only 13 per cent of which went to Asia""that kept the country relatively isolated. If growth crawled that year from the heights of the mid-nineties, it was as much a result of the lack of structural reform in the domestic economy and deterioration in government finances as a slowdown in world demand. In those days, some central bankers expressed mild triumph that the RBI had ignored the clamour for full convertibility of the rupee and opted for a phased transition instead.

For those who chose to read the signs, the virtues of partial insulation were, thus, patently in evidence. But critically, the Bombay Club's voice was slowly fading as Indian corporations shed their role of mendicants for government favours and rapidly got down to the business of adjusting to the challenges of globalisation.

Yet another decade later, in 2007, the front page of business papers couldn't be a bigger study in contrast to earlier years. In the past month, some $112 billion worth of investor wealth has been wiped out. In the past week, a crisis in the China markets, a drop in consumer confidence in the US and a strengthening currency in Japan have made all global markets hugely volatile, and India has been no exception.

But here's the surprise. This time, there are no complaints anywhere about the hazards of being an open economy. Instead, analysts are anxiously trying to track the mood of foreign institutional investors, who account for about a third of trading volumes. Again, as inflation soars on the back of surging demand and the unprecedented inflow of foreign funds, businessmen are looking at ways of shaving costs to stay competitive.

The short point is a widespread recognition that globalisation, warts and all, is here to stay. Far from complaining about the problems it brings in terms of competition, India's business and financial circles are revelling in its opportunities. Business process outsourcing and contract research have been the early moves in reaping the gains of economic liberalisation. Now manufacturing companies have begun to understand this. Domestic infrastructure constraints to capacity expansion are being overcome by global takeovers in Europe, the US and Asia. Foreign capital is increasingly becoming the solution to the limited availability of domestic long-term capital to finance large projects.

The irony in all this, perhaps, is that Indian industry seems to be champing at the bit, so to speak, to grow their businesses, but the government seems to be thinking differently. Consider the news of the past few days. Instead of leaving markets to find their own level, the finance minister appears to be harking back to the seventies and eighties by prevailing on cement and steel manufacturers to hold the price line despite the hit they'll take on margins. In the Budget, he has chosen to impose a service tax on commercial rentals, a move that is designed to skew the real estate markets, especially in fast-growing centres of business and commerce like Gurgaon, Pune and Bangalore.

True, the enabling environment for business hasn't worsened, but there is nothing to suggest that there is going to be a great leap forward, either. In the long run, though Mrs Gandhi might not know this, it's the aam admi that will suffer.