Taurean Rush

In the annals of market history, the year 2003, when the Sensex turned 17, will go down as the year the most ferocious bull market—ever—fired up. Ironic, since nobody was interested in the Sensex in 2003. Indeed, you’d have been certain the equity cult was dead by 2003. On May 12, 2003, the Sensex was only 2943 points. Ten years prior, it was at 3346. A decade was over and the Sensex was actually in the negative, shaking the confidence of even the staunchest believers of the equity cult. But the next day, May 13, 2003, the Sensex, at 17, took off on a coltish dash that took all by surprise. A massive bull market ensued, which meant all the excesses of the 1990s were finally squeezed out of the system and the market was free to look forward. The Sensex hit 5839 by the year-end, the first of a series of rallies that took the market up to 6600 next December, an all-time high and, from there, tripling in just three years. By January 2008, the Sensex had hit the 21200 mark—a seven-fold rise in five years—making it the most amazing bull run ever.

Even the most diehard optimist would have found it impossible to dream up such a scenario. The Indian economy was still getting itself out of a deep slump that had started back in 1995, caused by over-expansion. The economic reforms of 1992 had opened up tremendous business opportunities, a relaxed monetary policy in 1994 kept money flowing and liberalised market regulations from 1993 allowed hundreds of companies, big and small, to flood the overseas and domestic market with fresh equity issues. In the deeply despondent situation of 2003, it was easy to forget that from 1993-95 there was a consensus among bureaucrats, businessmen, analysts and investors that the Indian Elephant was learning to dance and would outstrip the much-admired Asian Tigers. After a 7.4 per cent growth rate in 1994, India seemed to have come to a high-growth path. Some projected 9 per cent growth. Industry had sailed over a 10 per cent hurdle. Industry associations projected 12-14 per cent growth. To fund such ambitious growth targets, firms went on a capital-raising carnival.

Even though we were on a high till 1995, there had been practically no serious reforms after 1993 and Mannmohan Singh himself was reduced to an economic mascot. By early 1995, the Narasimha Rao government had elections and not the economy on its mind. The key to winning or losing elections is supposedly low inflation, the key to inflation is supposedly money supply and the key to money supply is with the RBI, which acted on Rao’s political compulsions. The RBI launched what is believed to be a tight money policy to keep inflation down. By late 1995, industry was gasping (so they cried). In 1997, CRB Capital Markets, India’s ‘number one’ finance company, collapsed. “The industry went for unrealistic expansion, way above sustainable growth...the 1994-96 boom was obviously unsustainable,” S.S. Tarapore, a former RBI deputy governor, wrote in Business Standard in mid-1999.

What Tarapore didn’t mention was that during the boom—and under the RBI’s watch—the banks lent money without realistic enforceable security or allowed their loans to turn bad by sheer neglect and corruption. Simultaneouly, mutual funds and foreign investors put money in the stocks of uncompetitive companies with poor management and accountability. In essence, these two providers of capital funded the Indian corporate sector’s dream of raising large amounts of capital for quick growth in asset size. Often, the owners had taken their money out even before the project was commissioned. Having done that, some went a step further, diversifying into more high-risk capital-guzzling businesses like property development and financial services.

Of course, every year since 1996, the Sensex rallied on hopes of reforms, only to be crushed by adverse economic and political forces. If in August 1997 it was the Asian crisis, in 1998 it was the nuclear tests. In 1999, another frenzied rally followed by a huge collapse and another stockmarket scam. After 2000, much of the global economy was shattered; the aftermath of the dotcom bust, the 9/11 attacks and massive corporate scandals involving Enron, Worldcom et al. So, by 2003, India’s banks were ravaged, excess capacities stood idle, equity (and debt) became unserviceable and investors were disillusioned. But interest rates were low, companies were quietly restructuring and the seeds of a bull market were sown.

Market analyst Debashis Basu is editor and publisher, Moneylife