Stock Market Crash
By Shivaji Sarkar
The Bombay stock market, like most others across the world, has crashed. It has lost about 4000 points in a matter of weeks.
The BSE sensex took a year to gain from 29,663 to touch 36, 443. In about a month it came down to 32,596. The Nifty too crashed below its 10,000 mark to 9998 and is likely to fall further.
It does not look much to the common man. He should be happy with the latest GDP data that shows, as also the World Bank and others say, it is poised to rise above 7 per cent. Still it is not being considered as a crash and the provident funds, be it EPFO or National Pension Fund are being forced to invest in the stocks exposing millions of employees to unforeseen risks.
The crash now is being ascribed to the trade war started by US President Donald Trump. His sharp hike on duties to protect his home market has led the world trade and stock market into deep crisis. Trump signed a presidential memorandum that could impose tariffs on up to $60 billion of Chinese goods including steel, although the measures have a 30-day consultation period. In retaliation, China unveiled plans to impose tariffs on up to $3 billion of US imports.
The Friday, March 23 crash of 409.73 points is estimated to have cost Rs 1.57 lakh crore to the investors. It means on an average every 100-point sensex loss amounts to Rs 40,000 crore. Since early February it has lost over 4,000 points. By the market logic the total loss to the investors, means also banks, financial institutions, insurance companies and mutual funds apart from individuals, is estimated at over Rs 16 lakh crore. It is not a notional loss. It would add to NPAs of banks and other FIs.
When the crashes are of small nature, there remains hope of some recovery but when the loss is of such magnitude, the real erosion to the wealth will take a little time to assess. Once again the banks, insurance companies and mutual funds would take the maximum brunt of it as many investors borrow money to make quick gains.
In such situation, pension funds, be it of the government or private would have lot of their wealth wiped off. But the losses would not be of the companies, but would be distributed to the employee members. It is a potential risk to the employees and senior citizens who receive monthly pension from these organisations.
Another aspect must be understood. Pension as is being now propagated is neither a dole nor subsidy. The legal definition for pension is deferred wages. A part of the wages remains unpaid to the employees during their employment. That part is paid, as a social security measure, after they are out of job. The concept is that if it is paid during their employment they would spend it and would have nothing when they superannuate.
The society has to do a perspective planning to meet its futuristic needs, called actuary in insurance terms. If it fails in this assessment it can lead to severe societal crisis. The society needs therefore to take stock of all economic and social activities with due caution and care.
Mostly such occurrences, though are known to those in the business, are put under wraps so as not to cause a concern. The latest development is not a one-time affair. The stock markets in India continued to fall in 2016. By February 16, 2016, the BSE had seen a fall of 26 per cent over the previous 11 months. The reasons given for this included NPAs of Indian banks, “global weaknesses” and “global factors”. In the four months since November 2015 to February 2016, FIIs were reported to have sold equities worth Rs 17,318 crore as, in the opinion of analysts, concerns at that time grew over growth in China.
On November 9, 2016, the BSE crashed by 1689 points, believed by analysts due to the crack down on black money by the Indian government, resulting in frantic selling. The sensex nosedived by 6 per cent to 26,902 and the Nifty dropped by 541 pints to 8002. These were said to be due to the demonetisation and for the next many weeks the downhill movement continued.
In 2015, crude oil prices tumbled below $30 per barrel. Now the concern has changed to as crude touches over $ 64. Though in either, the Indian consumer did not gain. High taxes and unethical daily fixing of retail oil prices continue to erode the pockets of the common man.
Another concern is the weakening rupee. During the past two years it has maintained itself around Rs 65. It should not be solace to an economy that is poised for growth. It pushes down prices of Indian goods in the global market and makes all imports expensive, adding to the cost of infrastructure.
The stock market in reality has little to add to the economy. Its losses, however, are designed in a way that it affects all and erodes the wealth of non-players. One has to recall in the Indian context the 1992 stock boom and bust — the Harshad Mehta scam. It roiled all and wiped of the Unit Trust of India and millions of its depositors apart from many banks and the Life Insurance Corporation. Those NPAs were never recovered and have been written off. Who lost? The investors lost it in terms of lowering of interest rates and hiking of various bank charges. And, the perpetrators are seldom penalised.
This nation is at a loss to look for ways to make up such losses on the one hand and ways to check the future losses. The looters are smarter than social systems. The SEBI and its various moves have neither protected shareholders of a company nor could protect them from the market maneuvers.
In the present context, also the employees are likely to be the worst sufferers. The government must step in. It must call upon all the provident funds and mutual funds to immediately stop from investing in the stock market. Most the financial institutions are pressed by the government agencies to rescue stock market. This must be prevented till the market remains choppy and it is likely to remain so for the rest of 2018 as the trade war may spill beyond. —INFA