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Stock Markets: Lifting the veil...

Sep 19, 2000

It seems almost as if the stock markets had put a veil over themselves as far as the rising crude prices were concerned. Now that the PM is returning (!), panic seems to have gripped the market. Stock markets often move for inexplicable reasons. In case of the Indian markets we have had many such instances over the last few weeks. First there was a failure in responding to the rising crude prices. Then software stocks continued to attract buying interest on the false pretext that higher crude prices would not impact the new economy sectors. And now the markets have all of a sudden decided to correct themselves. But here too the reasoning is absurd - the PM is coming back to India and petroleum prices would be revised shortly.

It is not difficult to support the argument that even if crude prices were not revised upwards, the economic situation in any case would deteriorate sharply. That is because the rise in expenditure that would result from higher prices is then funded by the government i.e. implicit subsidy. So sooner or later, the taxpayers have to bear the brunt of it by paying higher taxes. In turn, higher taxes would have implications on demand, investment and consumption.

Coming to the key implication of rising crude prices, there is another belief that since prices are rising globally, on a net basis, there is not much impact on India. However, even though presently we have no figures to support this, emerging economies like ours consume more oil per unit of GDP as compared to the developed countries. This exposes us to a greater impact.

Also, if we look around us, a number of the larger countries are in much better to fight off this menace from impacting their economies significantly. The US has large oil reserves and is also running a budget surplus, implying that in an extreme case the supply gap and the prices can be controlled. The EU too is likely to post a marginal surplus this year. China on the other hand has a large trade surplus, which will help it finance its oil imports. India on the other hand is grappling with higher deficits (trade and fiscal) and a not so vibrant economy (thus limiting our capability to absorb higher crude prices for long).

The scenario is one of pessimism. There is a possibility of an improvement in sentiment as companies announce their second quarter results next month. However, any recovery, not supported by a taming of crude prices, could prove to be short lived.

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