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There are a number of reasons for the recent meltdown in the stock markets but the main reason seems to be emanating from outside India. All major Asian markets have been experiencing a bloodbath at the bourses and India too had its share when the 30 share Sensex shed nearly 16 percent, from its record high on ‘Black Monday’, January 21.

All stock markets work on ’sentiments’ and the future of the biggest economy in the world, is of great concern to the market operators. The news of a coming recession in the US is enough to cause jitters in the world bourses because its future spending pattern and demand is linked with the global economy’s production and output.

The US economy was doing fine till the housing and credit bubble that was fuelled by low interest rates, burst. It led to the ’sub-prime’ mortgage crisis in which it was clear that the banks had been lending without checking the credentials of the borrowers. Default after default by ’sub-prime’ (below par) borrowers forced some of the top banks to go into red.

As happened in the past financial meltdowns, the effects of the sub-prime crisis took time to surface but recently, it started to cripple the entire banking system. When the scene became quite murky, the Federal Reserve chairman Ben Barnanke told the US Congress on January 18, 2008, “the downside risks to growth have become pronounced”.

This rang alarm bells because Barnanke said quite clearly that though recession was not in view this year, slow growth of the economy was a certainty this year and the next. Recently the IMF has also predicted a downturn of the US economy.

When India is so closely linked with the US economy through software and services (outsourcing) exports as well as commodity exports, there is bound to be a repercussion on the Indian economy and its growth prospects. Services contribute to around 60 percent of the GDP and therefore all the new wealth and the spending power that India is currently famous for, comes from this sector.

Even if ordinary people may not foresee any changes, the Foreign Institutional Investors (FIIs) can sense the vulnerability of the Indian economy to the downswing in the US because ‘decoupling’ by India is not feasible in the short term and the projected growth of 8.5 percent could well be dented.

In fact the future of business process outsourcing from India by US companies could be at stake. It has become a hot topic in the current Presidential election debates especially in places where joblessness among American software engineers has been rising.

Even Hillary Clinton who has supported outsourcing in the past is now sounding l)1ore cautious.

Should the new government in Washington in the autumn of 2008 legislate a ban on outsourcing, Indian IT companies would be in trouble even though they have employed top class lobbyists to promote their cause and dispel any false propaganda. Even India’s burgeoning foreign exchange reserves of $270 billion could be affected as they are dependent on the forex earnings from the service sector, remittances from abroad and capital inflows.

The government has been complacent about last year’s heavy FII inflows and despite urgings from various quarters to put a curb on them or at least regulate them, nothing much was done to control the hot money coming in. The FIIs have been in pursuit of higher returns that Indian companies have been offering and higher interest rates.

Some of the big FIIs corning from US have been scarred by the sub prime mortgage crisis and brokerage firms like Morgan Stanley incurred a loss of $18 billion. They were the first ones to sell heavily on Monday.

The other FIIs which have been flooding the market and boosting the stock market

(Through the Promisary Notes route) in recent times also sold their shares, booked profits and SI quit when they heard about the recession warnings in the US. Their sudden withdrawal has been a big blow to the stock market - a blow unforeseen and unanticipated.

Another contributing factor has also been the lack of sufficient liquidity in the market. Many brokers experienced a lack of liquidity because when clients saw the markets crash and the value of their shares plummet, they did not pay the required ‘margins‘ and shares were unloaded as a result-causing a glut and further tanking of the Sensex.

Day two of the crash was better. With the Federal Reserve of America taking a very bold step of cutting the rate for overnight loans between banks by .75 percent, to 3.5 percent, the market got a breather even though it had very little impact in the US stock markets. In India this step and the promise of big package of $150 billion ‘emergency spending plan’ by President George W. Bush have been viewed positively by the Indian stock market which has responded well with signs of recovery.

Since many shares have become cheaper, some big players have been fishing at the tank’s bottom. LIC and SBI have bought Rs 1500 crore worth of shares and loans have been extended to market players to help them with liquidity. But the recent scam in France’s second biggest bank Societe Generale of 4.9 billion euros ($7 billion) has again caused some panic. 

Finance Minister P. Chidambaram has assured that nothing is wrong, with the fundamentals of the Indian economy and it is on a high growth trajectory. This has helped to sooth’ frayed nerves but market sentiment have their own barometer for gauging which way the economy is going. Even the political scene has a role to play and if the market perceives that the government is weak or is a lame duck government, it may move in unpredictable manner.

If the RBI also announces a rate cut, it would help shore up the market, sentiments but then the RBI has to be cautious as it has to do a balancing act between curbing inflation and helping recovery of the stock market. A rate cut would however bring about some parity between Indian and international rates, as Indian rates are currently much higher.

Otherwise, Indians would be borrowing more from abroad and a large outflow of funds could take place. Another surge in FII inflow could also take place but this time, round, the government may take , some steps towards regulating the inflows-especially because exporters cannot compete globally if the rupee strengthens further against the dollar. In these troubled times, the strength of the manufacturing sector and the agricultural sector could assist in ‘decoupling‘ the Indian from the US economy somewhat, and avoid a severe downturn.

In all the market turbulence of January and the hype around Central bank meetings, this earnings season got sort of smothered. Now that the more obvious triggers have played out, one has a little more time to reflect on how earnings shaped up this quarter. While it wasn’t a bad quarter, it wasn’t the best we have seen in recent times. The aggregated growth numbers for all companies may not paint a very gloomy picture but a closer look does reveal a few warts.

Other income played a fairly important role this time. My guess, as I haven’t been able to collate all the numbers yet, is that earnings growth stripped of other income will be close to the 15 per cent mark. While that’s not terrible, it isn’t spectacular either. But that’s all a jumbled mass of statistics which hides more than it reveals. What is a bit more disappointing is that there were hardly any positive surprises, the steroid that is necessary to support expanding valuations. I don’t think there will be more than one or two earnings upgrades for the Sensex stocks, if that. Only the odd L&T etc. On the other hand there could be a few downgrades for stocks like Hindalco and Reliance energy Overall, for the large cap universe there may not be significant revisions, upward or downward but for midcaps there have been many more disappointments in this quarter compared to the last. Liquid names like PTC, IDB, Voltas, Ispat, JSW steel, India cement, Dena bank and Escorts all fell short of expectations. There were many more. This is worrying.

The results aren’t bad enough to start panicking but one need to be very watchful. Topline growth is moderating and margins are showing some strain under raw material and cost pressures. In a difficult global environment, if earnings start getting downgraded in 2008, that will raise the risk of stocks getting derated. The external risks, of global slowdown and liquidity withdrawals, while very real are less intrinsic to core stock prices over a longer time frame. If indeed India has to outperform in a sluggish equity environment, earnings will have to show more sparkle. Having been spoilt for the last three years with continuous earnings surprises and upgrade, the market may have lost it’s tolerance for lacklustre numbers.

Union Minister of Communication and Information Technology A. Raja said the 3G spectrum (wifi) would soon be a reality in the country soon. The third generation (3G) wireless technology (spectrum) would provide faster, easier and better connectivity to all types of cell and internet users with the help of WIFI towers.

After inaugurating the two-day 11^th National e-Governance Conference, Raja said modalities were - being worked out in this regard. A meeting with representatives of information technology and space research departments and private players was scheduled on February 20.While some telecom companies were being allocated bandwidths, other modalities were being finalised so that the 3G spectrum could be implemented in the next few months.

Raja was hopeful of an early implementation of the project for which government agencies like Bharat Sanchar Nigam Limited (BSNL) and the Indian Space Research Organisation (ISRO) are to erect wifi towers. Relevant cyber laws were also being framed by the agencies concerned, he said. To a question on the inadequate monitoring and updating of interactive portals of government agencies, he said conferences like the one that began today were being held to address such.

Almost all states of the country would implement their respective state-wide area networks (SWANs) by 2009. At the 11th National e-Governance Conference, Union Ministry of Communications and IT Additional Secretary R. Chandrasekhar and his counterpart in the Ministry of Personnel, Public Grievances and Pensions, Dhruv Vijai Singh, said Haryana, Himachal Pradesh, Jharkhand and Tamil Nadu already had operational SWANs, while the other states would follow suit by next year.

They said an outlay of Rs 1,500 crore was expected for IT infrastructure in the Union Budget 2008-09. This was to bring about an IT revolution in the country. Subsequently, e-governance would be citizen-centric.  Asked if e-governance would render the services of huge chunk of government staff irrelevant, Chandrasekhar said, “This is a myth.” He insisted that government agencies and their staff would remain relevant to render services with the IT and e-governance infrastructure. “E-governance primarily aims at improving the services for the people,” he explained.

Dhruv Vijai Singh said that there was little or no knowledge about e-governance among most people, particularly in rural India, though he felt once the infrastructure was in place, efforts would be made to disseminate information about e-services among the masses.Asked about the rapid outsourcing of services to the private sector, the officials said private players would remain service providers, while the policy making and monitoring would be the government’s domain. Chandrasekhar maintained that the government had ensured that the private sector set up data banks of different areas in a foolproof manner. They highlighted initiatives of government agencies to ensure improvement in e-facilities.