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'Save' the market

The why, what and how-to of policy making.

By Balaji Chandramouli        Print Edition: Nov 18, 2007

It is not often that one can draw parallels with the Chinese economy. If anything, we ape some of its economic policies, including the controversial SEZ initiative. However, in recent times, there is one serious problem nagging the two neighbours—that of quality. For China, it is in the manufacturing sector, while here, it is the financial sector. The recent gush of foreign capital into the Indian markets has resulted in market regulator SEBI applying quality filters to check inflows. However, the courage to apply the filter was not drawn from a conviction to stop “bad” quality money entering the system. Rather, it was a necessity, since the torrential inflows were heating up the market.

 TALE BEARER

 Ownership in PSUs

IndustryHow do you get employees to develop a sense of ownership in public sector infrastructure companies? Get the top man to camp at the project site till it is completed. When Power Secretary Anil Razdan found a state-owned 500-MW hydel project in Sikkim suffering time overruns, he called a meeting of NHPC top brass. The Director (Projects) was convinced that there would be no delays beyond December. Not convinced, the Secretary packed off the Director to the project site. His fiat: don’t come back till the project is complete. A good way to avoid the Capital’s ‘power’ distractions.

 Party over?

Just when the bureuacracy was getting used to the idea of slipping out for a few years to the private sector to enjoy fat pay packets, the government is rethinking the entire issue of allowing them to do so. It has set up a committee to examine the applications of 26 officers who have applied for a return ticket after serving in the private sector for a few years. Ironically, it is a former bureaucrat who set in motion the review process—the PM’s Principal Secretary, T.K.A. Nair.

However, underlying this capital flow is the country’s success story that is here to stay. So, the flooding could repeat. Further, capital controls will then be seen as a regressive move, since India is already walking up the full convertibility path.

The answer clearly lies in developing the domestic market, both on the debt and equity fronts. And, the markets must deepen with funds that are currently in bank deposits, post office certificates and the other such reliable instruments that add up to around 11 per cent of GDP. Currently, a very small portion of this finds its way into the markets through Unit Linked Investment Plans (ULIP), mutual funds and a small portion of incremental deposits that banks are allowed to invest in the market. The superiority of this capital lies in the fact that it is least prone to flight to markets overseas, unlike capital brought by foreign institutional investors, thus ensuring less volatility.

But to develop this requires a vigilant market regulator who is able to gain the confidence of the small investor. At present, the regulator cannot really lay claim to such confidence. Greater market participation by the small investor will only ensure a second degree of financial inclusiveness—the first being that of replacing the informal lending systems in rural India with the more efficient banking system. Importantly, the small investor will then be able to reap the benefits of the country’s growth story more efficiently. Surely, the Chinese do have a problem on this count as well— their growth story is far richer, but, alas, skewed, with rural China still in the grips of grinding poverty.

For a government that is busy licking its wounds inflicted by its allies—particularly by the Left parties on the Indo-US nuclear deal—this issue offers succour. Here’s why: it must revive the Insurance Bill currently in Parliament that seeks to allow select mutual funds to operate the pension funds of employees. Overcoming the Left parties’ allergy to markets and capitalism will not be easy, but it is easier than getting them to agree to a nuclear deal with the United States. After all, China, too, is now addressing the issue of financial inclusion.

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