Will finance minister Chidambaram produce another dream budget? Will he transform bears into bulls on the stock market? Such questions leave me smiling at two major illusions pervading our society.
The smaller illusion is that the stock market is the best indicator of the country’s health. The bigger illusion is that our stock market depends on what Indian politicians do.
In fact, in this globalised world, Indian stock markets dance mainly to the tune of international events. What Chidambaram or Sitaram Yechury say matters only up to a point: global events are the clinching factor.
Remember 1997? The stock market skyrocketed after Chidambaram’s dream budget. But the dream proved irrelevant when the Asian financial crisis struck six months later, and Indian markets crashed along with other global ones.
When Chidambaram was lauded for his budget, few in India saw any warning signal in the imminent collapse of Thai banks. Yet that proved to be an infinitely stronger trigger of economic events than Chidambaram’s dreams.
In subsequent years, the dependence of our stock market on global events has, if anything, increased. In 1998-2000, Indian markets suffered the same dotcom boom-and-bust as in the US.
They collapsed in tandem with the US market after 9/11, and later, both recovered in tandem. In 2003, low US interest rates induced global money to pour out of the US into all emerging markets, including India.
The BJP suffered from the illusion that foreigners were sold on India. In fact, India was just getting a slice of a global money shift: all Asian markets skyrocketed, including that of Pakistan (where there was no Infosys or Vajpayee).
In early 2004, it became clear that US interest rates were going to rise again, and so money began pouring out of emerging markets back into the US. All Asian markets fell, and India was no exception.
Illiterate political commentators thought the Indian market had fallen entirely because the BJP lost the election. Rubbish. The market would have fallen — possibly to a lesser extent — even if the BJP had won.
What happens in our stock market is essentially a global story, modified only to a modest extent by local events.
So, what are the critical international issues today? First, the speed at which US interest rates rise. Second, whether the Chinese economy suddenly slows down, slowing the world with it.
Third, whether terrorist attacks disrupt oil production in Saudi Arabia, raising oil prices to $100 a barrel and causing global recession. Fourth, fresh terrorist attacks in the US, a la 9/11.
This last factor has the biggest potential for disaster for all markets, including India’s. The CIA expects a major terrorist attack before the US election in November.
An attack on Spanish trains just before Spain’s election caused the humiliating defeat of Spanish Premier Aznar. Maybe something similar will happen in the US.
Experts are unanimous that Al-Qaeda will not replicate the plane bombs of 9/11, and will instead try a new approach. The one most mentioned, because it is easiest to pull off, is the dirty bomb.
This is an ordinary bomb into which is mixed low-level radioactive waste, the sort easily available from any nuclear reactor waste (including used clothes and gloves of workers in such facilities). Making these bombs is easy, so they could be exploded simultaneously in dozens of cities on the same day.
The aim of such a bomb is not to destroy buildings or people but to deposit radioactive debris over a large area in city centres. This radioactivity will be too mild to kill humans.
But it will create a long-term health risk which ensures that nobody wants to live or work in such an area.
This will have a huge financial impact. A dirty bomb will kill property value in city centres, wiping out billions of dollars. This, in turn, can kill banks that have lent against mortgages of supposedly valuable property that has suddenly become worthless.
The US economy has long been sustained by consumer spending based on massive borrowing against rising property values. If property values crash, so will consumer spending, and so will the whole basis of the US boom.
Remember that a crash in the financial sector and consumer spending caused the Great Depression of the 1930s.
Let me not exaggerate. We have learned from the Great Depression, and can better control the after-effects of a financial crash. Maybe cities can be scrubbed clean after a dirty bomb, though I doubt that will restore property values.
Overall, the risks are high enough to make my spine tingle. No matter what Chidambaram’s budget contains, we can be spiked by global events beyond our control. Globalisation has risks as well as advantages.