Mkts have lost touch with reality: Yashwant Sinha

2007-10-18 09:17:42 Source : CNBC-TV18

 

The BJP is blaming the UPA government and has, in fact, demanded a JPC (Joint Parliamentary Committee) probe into the stock market crash.

Senior BJP leader and former Finance Minister, Yashwant Sinha believes the stocks markets do not reflect the fundamentals of the Indian economy anymore, they have been taken over by speculators, which is leading him to believe that there is a scam in the markets. 

Former Chief Economic Advisor, Dr Shankar Acharya, believes that even though this step taken is a reasonable way of addressing the issue, there are better alternatives.

Excerpts from an exclusive interview with Yashwant Sinha and Shankar Acharya:

Q: Why the call for a JPC probe? On the April 30 you talked about the scam in the Indian stock markets well before we touched the 19,000 mark. What is leading the BJP to believe that there is a scam in this market?

Sinha: Basically the thing leading us to believe that a scam is taking place in the markets is that the stock markets in India have lost touch with reality. They do not reflect the fundamentals of the Indian economy anymore, they have been taken over by speculators. There is excessive speculation; excessive volatility in the market and such a situation arises only when there is a scam taking place in the market.

Q: Could you be more specific when you are saying we are disconnected with reality, but to compare us to a market like China, our P/Es are still much lower than the Chinese market, corporate India continues to deliver double digit growth, inflation is drag down to about 4%, so it is not really looking that terrible or disappointing on the economic front, why are you so apprehensive?

Sinha: When on the industrial production front, we were not doing so well when inflation was rising, did the stock market reflect that? They did not. Stocks markets kept rising and the point is today 51% of the total FII money, coming into the country, is accounted for by participatory notes that is a serious issue.

Q: Are you happy by what has been done by SEBI and by the Finance Ministry?

Sinha: We have been demanding for a long time now, that P-Notes should be banned and the genuine participants who are today forced to participate through P-Notes, should be asked to register as FIIs. And all those who are non-genuine should be filtered out.

Q: Isn't it more prudent to follow a calibrated approach like the one that has been followed by the SEBI, because as you yourself pointed out, 51% is coming off the market, it is coming through the P-Notes route at this point in time and given that you do not want to cause chaos, you do not want to cause the magnitude or the volatility that we could see if you do put a ban on the P-Note?

Sinha: Yes, that is why I am saying that the whole issue of P-Notes and the calibrated approach should have been put out by the government in a statement, which would have said what is it that the government or the SEBI is planning to do over a period of time.

Q: But during the India regime when in 2002 the Joint Parliamentary Committee probe suggested that P-Notes should actually be done away with, that there should be stringent punitive action against P-Notes, you did not do that during your tenure?

Sinha: Every set of situations is different from another set of situations. We did not have USD 250 billion in our foreign exchange reserves then, the markets were depressed, the markets were at 3,000-4,000 levels, they were not at 17,000-19,000 levels. There is a time for doing everything and therefore, I am saying that the whole issue of P-Notes should have been publicly announced.

The government policy, the SEBI policy step by step should have been announced, they should have said when exactly they want to do it. They are announcing the steps in isolation.

Q: Given the inflows USD 11 billion, only since the markets moved from 15,000 to 19,000, do you think what the Sebi has done is prudent and wise in this situation?

Acharya: I think it is a reasonable way of trying to address the problem, there are other ways, but this is a reasonable way and the proof of the pudding will be in the eating.

Q: You are saying that there are other reasonable ways of doing that, could you take us through some of the reasonable ways that the government could look at as possible alternatives?

Acharya: Instead of shooting down the P-Notes partially, what about making sure that all derivatives that are offshore aren't illegal, but at the same time opening up investments in Indian stock markets pretty much to anybody who meets KYC norms of foreign banks as well as domestic banks.

 Source: MC