Book Excerpt: In ‘Running Behind Lakshmi’, Adil Rustomjee tells how Manmohan-led reforms transformed the stock market
It tells how today’s market is largely a result of these efforts
Running behind Lakshmi: The Search for Wealth in India’s Stock Market by Adil Rustomjee. Hachette. Pages 880. Rs 1,599
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Book Title: Running behind Lakshmi: The Search for Wealth in India’s Stock Market
Author: Adil Rustomjee
An undervalued achievement of the PV Narasimha Rao — and Manmohan Singh — led reform effort that began in 1991 was the transformation of the stock market. Today’s market is largely a result of these efforts, and the decade from 1991 marks an era of great capital market reform and development.
So total has been the transformation and so complete the break with the historical continuity of the past, that over a century of market activity which preceded the break now appears as a blur, and it is common to find accounts of India’s markets starting from the 1990s. Yet, it remains an unsung story with unsung heroes.
Improving resource allocation by moving from state planning and control to price signalling in clearing markets was the usual and overarching reform objective. Since financial markets cleared better than factor markets for land or labour (and had fewer vested interests), they became part of the low-hanging fruit of reform. But this was never explicitly stated as such and simply evolved as a priority along the way. Also, plan outlays were now throwing up capital shortages, and stock markets could be used to fill resource gaps and meet funding requirements; any improvement in their functioning could prove handy.
Four distinct sets of activities took place during this period. First, a group of politicians and bureaucrats overcame the rent-seeking of a near-monopolist BSE and willed into existence a new exchange — the National Stock Exchange (NSE) — that would take on the old. Second, they uprooted the old microstructure and put in place a new one for the market. Third, that upstart exchange, the NSE, created new markets in derivatives and forward products that would dominate trading in the years ahead. Finally, the politicians and bureaucrats created a new framework for regulation by setting up a regulator — the Securities and Exchange Board of India (SEBI) — who would inaugurate systems on clearing, settlement, and dematerialisation that would be the final link to a new market.
The last decade of the twentieth century must therefore rank as the decisive decade of the stock market’s existence. The founding of (what later became) the dominant exchange, an entirely original microstructure, whole new markets for derivatives, and the creation of a regulator, all happened at the same time. All this change was distinct from the usual market dramabaazi that happens on a daily basis and, taken together, made for an uncertain and volatile period.
Little thought appears to have been given to sequencing, that vital strategic prerequisite of economic reform. It was all done in multi-splendoured, typically Indian fashion, all at the same time and with everybody stepping on everybody else’s toes, like the jostling and pushing of guests heading to the just-opened bar at a big fat Punjabi wedding.
But it was done. Much of it was carried out through the exertions of the novices who founded the NSE, but there were other participants, including politicians, bureaucrats, and academics, who played important roles. Appropriately enough, most of the change was completed by the turn of the millennium, and a market whose basic structure had not changed much in over 100 years found itself suddenly thrust into the twenty-first century.
Much of that early activity was done in Delhi — largely because market regulation at that time was the responsibility of the Finance Ministry’s Stock Exchange Division — and in 1988, the University of Delhi’s Department of Commerce conducted one of the first seminars on the stock market.
Received wisdom has it that Manmohan Singh, fed up with the inability of equity markets to fulfil their role of channelising savings towards risk capital, and seized of the need to attract capital flows following a 1991 balance of payments crisis, set up the NSE as part of the reform process that followed.
The new exchange’s initial achievement was remarkable — the BSE, a century-old incumbent operating a statutory monopoly on a liquidity pool, got overturned in less than a year by a rank upstart. Also, much of what is outlined was accomplished by a minority government.
— Excerpted from ‘Running Behind Lakshmi’, with permission from Hachette India/John Murray
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