India’s stock markets plunge

India’s stock markets plunged Monday, on investor panic that leftists may pressure the incoming government led by the Congress party to derail economic reforms. The Bombay Stock Exchange’s index in Mumbai plummeted more than 700 points Monday, a 15 per cent drop, before recovering some ground by mid-afternoon and closing down 564.7 points, or 11.14 per cent.

Although the fall also dragged down tech stock prices, the current stock market downturn is not directly linked to the tech sector, said Kiran Karnik, president of the National Association of Software and Service Companies (NASSCOM) in Delhi, which is the apex body for India’s large software services and business process outsourcing (BPO) industry.

“There was a little bit of concern among some customers abroad, and we did get some calls after they heard what happened to the stock markets,” said Karnik. “But they understand that all this is a transient reaction, and not based on anything substantial.”

The market capitalization drop of some tech companies, including outsourcing companies, is unlikely to affect their business, according to Prakash Gurbaxani, chief executive officer of TransWorks Information Services Pvt. Ltd., a Mumbai-based BPO company.

“Customers do not respond to the swings in the stock price of a company, but to the company’s continued ability to deliver quality services,” said Gurbaxani. “The mindset of the investor is quite different from that of the customer abroad. Customers may start getting worried if down the line the new government introduces policies that could work against the IT and BPO industries.”

Bangalore’s Infosys Technologies Ltd., the company with the highest market capitalization among Indian software services companies, dropped 10.9 per cent.

The plunge in the stock markets comes after statements by leftist officials that they would oppose the privatization of public sector companies, such as oil companies, a reform initiated by the previous government led by the Bharatiya Janata Party (BJP).

The Congress does not have a majority in the Indian Parliament, and will depend on the support of leftist parties and other smaller groups, all primarily united by their opposition to the BJP which they regard as a pro-Hindu communal party.

The BJP government’s economic reforms have been criticized because they left the majority of Indians, who live in rural areas, out of the pale of economic progress, instead favoring urban elites and industries such as telecom services, software and BPO, which primarily benefited the urban areas.

IT and BPO industry sources do not however expect the new government to reverse policies that help their industries, which are key foreign exchange earners and provide employment to a large segment of the urban population in India. “The IT and BPO industries in India contribute significantly to employment and foreign exchange revenues, and any government coming to power will not want to change that, even if they think they have to focus on rural development,” said Gurbaxani.

“It is worth recalling that the major economic reforms, involving a major turn-around in direction, were initiated by the Congress party (when it was last in power),” said Karnik.

The IT industry is also not worried about the leftists. The Communist-led government in India’s West Bengal state has some of the most forward-looking labor policies, particularly for the IT and BPO industry, and has been extremely proactive in seeking foreign investment, according to Karnik. The government of West Bengal has for instance declared the IT and BPO industries as essential services in line with electric and water supply utilities.

The Information Technology Association of America’s president Harris Miller was likewise impressed with the West Bengal government’s pro-IT attitude following his visit there in November 2003, according to Bob Cohen, ITAA senior vice president and spokesman.

In a bid to reassure the markets, Manmohan Singh, a Congress official and a former finance minister of the country said Monday that the Congress government’s policies would be pro-investment.

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