Articles by Parthapratim Pal

In the short run, India is not going to benefit from the free trade agreement with the Association of South-East Asian Nations that was finalised recently. ASEAN is not a natural trading partner of India, and, unlike China, India has not established close relations with the region. But the agreement may make strategic sense in the long run, especially if India wishes to become a hub for services exports.

The Indian experience with reform in the financial sector indicates that, inter alia, there are three important outcomes of such liberalisation. First, there is increased financial fragility, which the "irrational boom" in India's stock market epitomises. Second, there is a deflationary macroeconomic stance, which adversely affects public capital formation and the objectives of promoting employment and reducing poverty. Finally, there is a credit squeeze for the commodity producing sectors and a decline in credit delivery to rural India and small-scale industry. The belief that the financial deepening that results from liberalisation would in myriad ways neutralise these effects has not been realised.

The influence of FIIs on the movement of the Sensex became apparent after the 2004 general elections in India when the sudden reversal of FII flows triggered a panic reaction which resulted in very high volatility in the Indian stock market. During this period, the Sensex experienced the worst single-day decline in its history. In the three months between April and June 2004, the index declined by about 17 per cent. And it all started because of the selling pressure exerted by the FIIs after the elections when they became less confident about the continuation of the reform process in India. FII control in the companies that constitute the Sensex is very high. Data on the shareholding pattern show that the FIIs are currently the most dominant non-promoter shareholder in most of the Sensex companies and they also control more tradable shares of these companies than any other investor group.