India Markets Fall After Election
India’s main stock exchange suffered its worst crash ever Monday as fears that economic reforms may stall under Sonia Gandhi’s incoming government set off panicked selling.
Financial markets fell as much as 17% before recovering some of their losses after government institutions reportedly bought shares. Gandhi’s Indian National Congress Party tried to restore calm to the markets, which have lost about $50 billion since the party’s electoral victory Thursday, by insisting that the new government would be friendly to investors.
Amid the financial chaos, rumors swirled that Gandhi was close to dropping out as a candidate for prime minister. The speculation mounted Monday when she called newly elected members of Parliament and other allies to her official residence for the second night in a row. But later Monday night, a Congress Party official announced that Gandhi would meet today with President A.P.J. Abdul Kalam, presumably to confirm that she would form the next government.
Gandhi, 57, the Italian-born widow of assassinated former Prime Minister Rajiv Gandhi, is widely expected to be sworn in as prime minister as early as Wednesday, which would make her the first naturalized citizen to lead India.
Gandhi, already under fire from Hindu nationalists who say that her Italian roots make her unfit to govern, was dealt another blow Monday when left-wing parties decided not to join her government, though they promised to support it in parliamentary votes.
Monday’s losses, including a drop of more than 10% on the main indexes of the Bombay Stock Exchange, marked the worst single-day crash in the 129-year history of India’s financial markets. But with more than $100 billion in foreign currency reserves, India’s central bank said it would have no trouble paying foreign investors who cashed in Monday.
The job of trying to reassure investors fell to one of the Congress Party’s senior leaders, Manmohan Singh. As finance minister in the early 1990s, Singh launched India’s economic reforms and is now a leading candidate to be finance minister.
The coalition government will pursue “growth-oriented policies,” such as controlling wasteful public spending and increasing the emphasis on agricultural growth, education, healthcare and social security, Singh said.
Voters gave the alliance a mandate “to ensure that we do make a success of the Indian people’s struggle against mass poverty, ignorance and disease, which still affects millions and millions of our people,” Singh said. “That’s what unites us and our colleagues in the left.”
Even as Singh pledged solidarity with the left, he sought help from the right by calling Jaswant Singh, finance minister in outgoing Prime Minister Atal Behari Vajpayee’s government, to ask for his assistance in stabilizing the markets.
In a further sign that defeated Hindu nationalists are not going to make the transition easy for Gandhi, Jaswant Singh gave a halfhearted public response.
The finance minister told reporters that he shared concerns about the financial markets, but added, “It would nevertheless be of considerable help if the government that is attempting to come into being, or its putative partners, are careful about what they say.”
Senior Congress Party officials said last week that the new government would not privatize state-run companies that make a profit, and would maintain control of state-run oil companies. India’s Communists called on Gandhi to close down the disinvestment ministry that oversees the sale of state-run firms.
Those and other statements left investors worried that Gandhi may slow the shift toward more private investment and free trade.
“We are not pursuing privatization [of state-run firms] as an ideology,” Manmohan Singh said. “Our approach will be a selective approach, and wherever privatization is necessary in the national interest, it will be carried forward.”
In early trading today, India’s benchmark index rebounded by 5%, but it was unknown whether that gain would last.
Communist politicians blamed the crash on the manipulations of powerful capitalists. Some called it a conspiracy to destabilize Gandhi’s government before it takes power.
“Our analysis is that there is an inherent weakness in the Indian capital markets, in the sense that you have very few small investors and there are big players who are moving the market in a very big way,” said Nilotpal Basu, of the Communist Party of India (Marxist).
In an upset Thursday, Gandhi and her allies defeated Prime Minister Vajpayee’s alliance, led by his Bharatiya Janata Party. The BJP has made it clear that it wouldn’t give Gandhi an easy time as she tries to get a shaky coalition government on its feet.
The BJP is threatening nationwide protests because of Gandhi’s Italian birth. And the parties in Vajpayee’s National Democratic Alliance say they will boycott Gandhi’s swearing-in, though Vajpayee is expected to attend the ceremony.
As the stock market shock reverberated, Gandhi’s transition team was also reeling from the left-wing parties’ decision not to join her government. This would reduce the majority Gandhi could count on in the lower house of Parliament, called the Lok Sabha. But the leftists, led by the Communist Party of India (Marxist), said they would support Gandhi in parliamentary votes and want to influence her government’s policies.
Gandhi’s Congress Party and the Communists are bitter rivals in three of India’s states but share a goal in federal politics: They want a secular government that can keep Hindu nationalists from returning to power.
The Congress Party began to loosen the government’s grip on the economy in 1991 and says it will continue the reforms.
