Don’t panic when the stakes are down

By Priya Nigam

Indian stocks have been highly volatile over the past couple of months. It’s going to take us a long time to forget last month’s Sensex crash. The “Saare Jameen Par” joke was quite funny (on hindsight). But at that time I wasn’t exactly laughing. Actually, I couldn’t… was too busy chewing all ten finger-nails off.

The latest Economic Survey 2007-08, presented by Finance Minister, Mr. P Chidambaram, reminded us that the Indian stock market volatility is not new. Over the past two years, Indian stocks have been more volatile than those in several global markets. “In the period January 2006 to December 2007, the volatility of weekly returns of Indian (stock) indices was higher as compared to indices outside India such as S&P 500 of US and Kospi of South Korea,” the survey report said. While the stock markets may have taken us on a roller coaster ride, having scaled new heights and then crashing in October last year and again last month, Indian bourses did do well overall. The BSE Sensex jumped 47.1% in 2007.

Market capitalization, which is an indicator of investors' wealth, nearly doubled last year to $1,683 billion, according to the survey report. While this is good per se, it still stands short of China’s $4,459 billion and substantially below the US figure of $17,773.05 billion. Having said that, it is also worth noting that India's market capitalisation was 150% of the country's GDP, while this figure stands at 137.3% for China and 128.8% for the US.

“Individual investors need to take informed decisions and remain cautious,” the annual report added, while warning against “herd mentality” and “panic.” There is some concern over a slowdown in capital inflows, which would exert pressure on stocks. But there is reason to be bullish. Expectations are for companies to report strong earnings, which should support the stock markets. India has already grown into a trillion dollar economy, with GDP growth being close to 9% for the last three years. This fiscal also, the economy is expected to record 8.7% growth. The survey did identify some challenges to this growth, including India’s weak infrastructure, the rupee appreciation, inflation and the US slowdown. And to boost this growth rate to double digits, India will need additional reforms, the survey added.

One obstacle that India will definitely need to tackle is its shortfall of skilled personnel. Companies are already struggling with high wages and attrition. India needs to have a significantly larger number of institutions offering professional education and vocational training. “If we get our skill development act right, we will be harnessing a ‘demographic dividend’,” Mr. Chidambaram said.

Despite the uncertainties and shortfalls, it was good to hear the Finance Minister say, “If you wish me to sum up in one phrase the outlook for 2008-09 then I would say 'optimism', but with caution as the 'watchword'. There are a number of things going in favour of India.”