A Federal series on three decades of reforms

As part of our series on three decades of liberalisation, today we look at the journey of Sensex to 50,000 and the impact of reforms on the returns

Part 28

Sensex and you: Impact of reforms on stock markets and investors

Uploaded 08 February, 2021

Alam Srinivas


"In the long run we are all dead"

- Economist John Maynard Keynes

"In the long run, the returns from stocks are better"

- Several economists

Both these dictums are right and wrong. The truism of the first depends on the definition of the “long run”. If the time horizon is a few decades, as it is to gauge personal returns, Keynes doesn’t matter. If it is a few hundred years, the returns are irrelevant. In the second maxim, the starting and end points are crucial. Begin from ‘X’ month in ‘Y’ year, and end with ‘A’ month in ‘B’ year, and the profits may be astounding. Do the math a little differently, and you may stare at a huge loss.

Let us do this calculation for the Bombay Stock Exchange (BSE) Index, Sensex, over the past three decades. If we begin our story from July 1991, when Finance Minister Manmohan Singh came out with his spectacular and startling first Budget and ‘New Industrial Policy’, the narrative is extraordinary. From 1500 points, the Sensex whooshed stratospherically to 50,000 points, or more than 33 times. If we shift the beginning a wee bit, and start from April 1992, the rise is only 12.5 times.

The idea is not to undermine the gains to the investors because of reforms, but to warn them that stocks can give different signals to different people based on their expectations and biases. Between July 1991 and March 1992, Harshad Mehta single-handedly pulled up the Sensex like no one had done before. A similar thing happened in the recent past, when the index miraculously went up by 100% during the last 10-11 months in the midst of COVID crisis.

In other words, if the virus had attacked the globe in 2021, and not 2020, and stocks tanked like they did in March last year, the rise in the Sensex between July 1991 and February 2021 would be about 20 times, and not 33 times. It may be apt to mention that the BSE index was below 3,000 points, both in 1998 and 2003, which is more than 1,000 points lower than what it was in April 1992. Such are the vagaries and mysteries of the stock markets. You can prove anything you wish to.

Just to rub it in, and scare the investors further, the index skyrocketed from below 3,000 to 20,000 between April 2003 and December 2007. And then went into a free fall, and slipped below 10,000 within a year, thanks to the Global Financial Crisis. Since then, there were at least three major downward swings, the lowest being 4,000 points. Of course, this implies that there were as many bull runs too. The point is that if you are caught in a slide, you are dead in the shortest possible period.

But just for comparison sake, let us assume that you were savvy enough to buy a lot of shares in 1991, as you correctly predicted that reforms would unleash growth. As an investor, has your life changed? Going by another set of statistics, the markets became mature, fair, and transparent. The stranglehold of unruly, speculative, and greedy-grubby brokers was broken to an extent by the regulator, SEBI, and slew of policy initiatives followed, as foreign investors poured in.

The market capitalization of BSE, which was under a trillion rupees in March 1991, stood at Rs 186 trillion on January 31, 2021. It went up further, as the index rose by 4,000 points after Budget 2021. This is more significant as the number of companies listed on the exchange grew by a mere 67% during the same period. More important is the participation of the small investors through mutual funds – the latter’s combined assets were up by 6500% between March 1993 and December 2020.

However, there is one aspect that has changed so much that its impact remains the same in 30 years. In 1991, even as journalists we found it difficult to source stock data. Annual reports were largely accessible to shareholders; the other option was to go to the messy offices of the exchanges. Hence, investors were invariably starved of facts, figures, and numbers. They had to go by what they were told, which was largely hyped, or what they read, which too was biased.

In contrast, there is a deluge of information today. Each Prospectus of a company that wishes to raise money through the stock markets runs into hundreds of pages in small type. There are dozens of analysts’ reports, which are released at regular intervals on specific stocks and are available online. This leads to confusion and chaos. Different brokerage houses advise people to sell, hold or buy the same stock. No one, or not many, can make sense of the prospectuses.

Faced with these scenarios, the investors had only one choice, then and now – to depend on others to tell them what to buy and sell. Earlier, they based their faith on brokers, relatives, friends, or anyone they knew who knew something about stocks. Today, so-called savvy and well-dressed financial planners, new-age brokerages, analysts, and banks’ relationship managers advise us. We even get regular morning updates on WhatsApp about which stocks are likely to go up or down each day.

As a journalist, there is one question, or variations of it, that one is asked at social gatherings, parties, and meetings. Which stock should one buy? What will happen to the Sensex? Is this the good time to be in the market, or should one exit? This was true in 1991, and it is true today. It means that the so-called changes that were aimed to help the investors have come to naught. Regular disclosures by companies haven’t led to transparency; they have made the system as opaque as ever.

Mis-selling, mis-representations, exaggerations and, hence, scams continue. Investors are told to read the fine print; the damn print is so small and fine that its implication escapes most of us. The so-called experts mis-guide us; when they are proved wrong, they wriggle out of the situations. We are informed that mutual funds are safer than stocks; 2008 and 2020 proved that the former were as risky. This is especially the case with other assets that are linked to equity.

Post Script: I am always intrigued by the Sensex. Not that it crests and troughs, bobs and weaves, twists and turns, and goes from one extreme to another. But why is it called the Sensex? According to a website, it was “coined by stock market analyst Deepak Mohoni, and is a portmanteau of the words, Sensitive and Index”. To me, it seems to indicate sensual pleasures of the best or basest kinds – speculation, greed, gambling, and wealth creation and acquisition by any means.

With 35 years of experience, Alam Srinivas, an independent journalist, writer and researcher, has worked for premier global and Indian media organizations. He has authored several books on business and sports corruption.

Part 28