Some time in August, finance minister Yashwant Sinha had said that the market would recover by September. When quizzed by economic editors in the first week of September about the basis of his optimism, Mr Sinha tried to modify his statement. "I never said that I have a magic wand that would bring about recovery by September. All that I said was that based on a good monsoon and a good harvest, there was reason to believe that there would be an upturn in sentiments by September."
September has come and gone. But there is no sign of a market recovery. If there is any sign, it is one of a long bearish phase. The first half of the current financial year did not have any good news for the market. The 30-scrip Sensex of the Bombay Stock Exchange dipped by 20 per cent and the 50-scrip Nifty of the National Stock Exchange fell by 19 per cent in the six-month period.
The biggest bull of the Indian capital market, Unit Trust of India, has just been tamed with the revelation that the net asset value of its premier scheme, US-64, is lower than its sale or repurchase price. UTI is busy firefighting, cajoling corporate investors to support US-64 and even holding out veiled threats that if the corporates did not support the scheme, they might have to suffer sharp erosion in the market capitalisation of their stocks. After all, UTI holds substantial chunks of equity in major corporates and if it decides to offload shares in any of these, who can stall its slide in the market?
There is a good chance that UTI's strategy to put up a brave front in the face of the current market adversity may fail and even boomerang on it. For, how long can UTI brush aside the harsh reality that it had been paying out to its investors a much higher return than what would be justified by the equity market movements! In other words, it was financing those returns to its investors after dipping into the scheme's reserves in the hope that new subscribers would keep coming indefinitely at a higher sale price and keep the scheme afloat. This is inherently unsustainable. Hence, such a scheme cannot but collapse some day, unless the fund managers decide to modify it suitably.
For the moment, UTI has tried to act bold by announcing a higher sale and repurchase price for US-64 units. Coupled with the exhortation and mild pressure on corporates to continue supporting the US-64 scheme, such a strategy might help UTI buy some more time. But how long it can avoid the inevitable is anybody's guess. And its implications for the capital market too are not very difficult to fathom.
Even fundamentals of the Indian economy point to deeper problems ahead. Industrial growth is yet to pick up; it was estimated at 1.6 per cent in the first four months of the current fiscal year. Exports declined by 2.86 per cent in April-August 1998, while imports rose by 5.6 per cent. The primary market is completely dull. The global meltdown of markets has begun casting its ominous shadow on the Indian market as well.
In the midst of all this, the Indian finance minister has announced that he will not only stick to the fiscal deficit target announced at the time of the 1998-99 budget, he would also exceed the target of Rs 5,000 crore to be mobilised through divestment of government equity in PSUs. The government has already missed its first target of kicking off the divestment of its equity on Container Corporation of India (Concor), scheduled for end-September. No one knows when it will get rescheduled.
Given the current market turmoil and uncertainty following the UTI episode, the finance minister should consider himself extremely lucky if he can complete the divestment of even one PSU during the current financial year. He may be relying a lot on strategic sales and the newly devised method of creating special purpose vehicles for this purpose. But both the routes are controversial and, therefore, may bring the process to a halt. With three crucial assembly elections forthcoming, the BJP-led government may also be a little cautious in implementing schemes that have seeds of controversy in them. Even otherwise, there is perfect economic merit in the argument that divestment of equity in a dull market should be postponed till such time sentiments improve and the seller gets a better price.
So, what should Mr Sinha do? Well, he might do well to reconsider the targets he had fixed in June while presenting the budget. Instead of trying to stick to the fiscal deficit target by divesting government equity in PSUs at whatever price he gets, he should adopt a pragmatic approach in reaching his target. True, he cannot slash the salary budgets or interest payments because of their very nature. But certainly, there are other measures available to him. For instance, can he raise revenue collection? Can some of the non-obligatory expenditures be curtailed?
The danger in the finance minister zealous pursuit of reaching the PSU divestment target is that the government might commit precisely the same mistake which opponents of divestment have been warning against ever since Manmohan Singh initiated it in 1992. Mr Sinha might be accused of "selling family silver" at a throw-away price, if he goes ahead and divests government stake in blue chip PSUs like Indian Oil Corporation and VSNL in today's depressed market. There is a lot of pragmatism in postponing such divestment till the market improves a little, even though this might mean a slippage in meeting the fiscal deficit target. And didn't Mr Sinha say some time back that he would like to be remembered as a pragmatic finance minister?
