Tuesday 19 March 2013

Why India’s poor need a vibrant stock market

The poor have no stake in the stock market, right? Wrong.
On the contrary, the poor have a greater stake in the stock market than rich investors do. Prakash Karat and his ilk who have appropriated for themselves the position of spokespersons of the poor need to understand this.
There are several ways in which this story plays itself out, but the one line I wish to explore for now is inflation.
Allow me to step back a little and take you to this morning’s newspaper headlines. Petrol prices are up by over Rs 7 depending on where you live. Comrade Raja of the Communist Party of India would have you know that this will have a cascading effect on prices and will hurt the poor. No kidding.
This Comrade like other comrades who are wont to prefer ideology to facts, do not even have a rudimentary understanding of market economics or a grasp of the facts. If he had bothered to check the facts, he would have known that we have adequate stocks of rice and pulses, which if used properly, need not make this increase hugely painful for the poor. If the Comrade had an understanding of market economics, he would have figured out that his solution of not raising prices is not just simplistic and naive but suicidal in the short, medium and long run. Unburdened by the pressures of having ever had to rule, hence untormented by the burden of policy making, the good Comrade knows only to oppose which he does, like his other brethren whose propensity to paint the world red has left the finances of many countries swathed in similar colours, only difference being in the shade of red.
But why did they have to raise fuel prices? Because the oil bill shot through the roof. Today’s DNA tells me that every rupee decline against the dollar adds Rs 8000 crore to the oil bill.
Why did the oil bill go through the roof? Because the dollar surged ahead, not persuaded by the assurances of the government.
Why did the dollar surge ahead? Because there are many more foreign investors wanting to get their investments out than those wanting in.
Why do they want out? They want out because they do not see the Indian policy environment with all of its flip flops as being a stable one to be invested in. So they are buying dollars.
The timing of all this could not be worse. As a country, we are running an unacceptably high current account deficit. The result of this is that we are dipping into our foreign exchange reserves to finance our consumption. I won’t bore you with the precise numbers but suffice to say that the numbers are alarming as they are showing no signs of correcting. Historically, remittances from Indian resident overseas has helped bridge the gap but with the world in turmoil that too has come down. So we have to dip into our reserves to finance our purchase of day to day needs such as oil and so on. At the same time, if we have to use the forex reserves to meet the burgeoning demand for dollars from foreigners who want to take their money out, we have a problem on our hands. There is simply not enough dollars in our reserve kitty to defend in any meaningful way the rupee, hence a sliding rupee is inevitable.
So, when the stock market tanks, and foreigners take money faster than it comes in, as the dollar rises and oil bill shoots up, a petrol price hike becomes necessary. When petrol price increases and other fuel prices follow, the cost of inputs goes up, the cost of moving goods goes up, inflationary conditions sets in.
The poor and those working on daily wages are the worst affected by inflation. They don’t enjoy the benefit of inflation indexing or what the salaried class knows as DA or Dearness Allowance which corrects their wages automatically for inflation.
When the rich lose money in the stock markets, their wealth erodes and that’s that. But when foreign capital takes flight, as the dollar strengthens and inflation raises its ugly head, the poor have a tough time just living, one meal at a time.
My friend Ashish who now heads the BSE told me that as much as 2 % of our growth rides on the back of foreign capital. I have also seen back of the envelope calculations which establish a clear correlation between economic growth and job creation.
So when the stock market behaves as it has been doing, the poor really get a raw deal. It is high time their champions woke up to this.


  1. very simple...very lucid...

  2. Thanks Swami making extremely complex issues simple for the reader.

    Ther is also a debate on who is more subsidised. The Poor as popurlarly believed or the middle class.


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