Investors, markets have lost faith in UPA regime
As the Sensex tanked to a four-year low on Friday in terms of a single-day fall and the rupee maintained its dangerous tumble, the Congress-led UPA Government appears clueless on how to respond. The best that Prime Minister Manmohan Singh could think of is to compare the situation favourably with the 1991 crisis. That is small comfort because things could not have got worse than it did then, and any comparison with those days will present a positive picture. But there is nothing calming in the situation today, much as Mr Singh and his Finance Minister P Chidambaram want us to believe. Unlike on other occasions when the markets crashed for a variety of reasons not necessarily connected with Government initiatives, the Friday drop was a direct fall-out of the Reserve Bank of India's move to tighten capital controls in a bid to save the rupee. The RBI and the Union Government ought to realise that, in a situation when investor sentiments are already low and the markets are far from buoyant, any ill-thought move to artificially shore up the rupee would adversely impact shareholders, compel them to offload their holdings and lead the market indices to plummet. While the Government has denied any further controls, neither industry nor the markets are convinced. After all, in recent days, the Centre (read the RBI too) has taken a flurry of steps that it believes will check the rupee's free-fall. One of these is that outward investment limit has been slashed from 400 per cent of net worth to 100 per cent under the automatic route. While experts believe that in terms of real impact the decision is not as drastic as it sounds, the move nevertheless is strongly symbolic of the Government's desperation to tackle a crisis largely of its own making. But a desperate and directionless regime does not invite optimism.
One indicator of the sinking confidence of investors in particular and industry in general in a quick economic recovery is that the price of gold has surged to a two-year high. Clearly, people at large and investors especially are not willing to buy into the Government's assurances and would rather invest in the more robust yellow metal even when it has been made more expensive. For the UPA regime, the rising demand for gold will be worrisome because it has been struggling to convince the people against importing the commodity as these imports further worsen the country's burgeoning current account deficit.
The issue, however, is not about micromanaging the economy, though experts have to keep working on that. The present state of affairs is more a crisis of confidence in the UPA Government which has, since taking over, turned a robust economy into a tottering one. It appears that both the industry and the markets have given up on the regime, and the mayhem which we witnessed on Friday is but one expression of that lack of confidence. Who knows, more such disasters may happen before the Congress-led regime is, hopefully, booted out.