Published November 27, 2008

India's stock market plunge shatters middle-class dreams

(NEW DELHI) Sunil Kapadia would regularly borrow from banks to invest in India's stock markets, seeing them as a one-way ticket up the middle-class ladder as the economy hummed along at near double-digit growth rates.

But his dream of easy riches lay wrecked as the country's main stock index tumbled to three-year lows last month, taking its losses in 2008 to more than 50 per cent, forcing him to move his family to a cramped suburban apartment.

'In the quest for jam, I have lost my bread and butter,' said 48-year-old Mumbai resident Kapadia, who lost 20 million rupees (S$609,000) in share trading this year.

Thousands of small investors were lured into booming stock and commodity markets as the economy soared along at growth rates of 9 per cent or higher in the past three fiscal years and the government spoke of lifting the increases into double digits.

Now, with the vicious collapse of the market, their savings are lost and they are unable and unwilling to invest again.

The crash has also hit commodities, with prices of goods from edible oils to metals dropping by 40 to 50 per cent over the past four to five months.

It is a hard blow to the confidence of India's aspiring middle classes, and their curtailed spending has also unsettled the foreign firms and investors who were queuing up to do business in the US$1 trillion economy.

'At the moment, investors are scared of their own shadows, and it will take some time for them to be back,' said Vikram Bhatt, head of brokerage firm Ajmera Associates of Mumbai.

Most small investors were lured by a seemingly unstoppable bull run in the stock market. The main 30-share index on the Bombay Stock Exchange rose by six times in the five years to the end of 2007, bolstered by foreign funds.

Foreign institutional investors (FIIs), having bought a record net US$17.4 billion of stocks last year as the market rose 47 per cent, have sold more than US$13.5 billion of stocks in 2008.

Brash traders became a symbol of India's modernising economy, and stocks were so popular among retail investors that some could eke out a meagre living on the sidewalks by selling IPO and mutual fund applications for a few rupees. But small investors have largely disappeared as the market imploded. From a record high just above 21,200 points in January, the BSE index crashed to just below 7,700 last month.

Although statistics show only 2.5 per cent of India's 1.1 billion population invests in stocks, experts say the number of investors was growing steadily when the market nosedived.

'I want to sell off my apartment to pay off my loans, but word has spread that I have fallen on bad times and the offers are not good,' said Abhijit Choudhury, a share investor from the eastern city of Kolkata, who lost two million rupees in a month.

'I am ruined and not coming back to the stock market,' said Mr Choudhury, unemployed for years before striking gold in the markets.

Risk-averse investors now favour the safety of fixed deposits. Bank deposit rates have risen to more than 10 per cent in the last two to three months.

'The market will continue to downslide as most of the money was flowing in from FIIs and the insurance sector all this while,' Vinod Kumar Sharma, head of research at Anagram Capital Ltd said. 'The impact on stocks have been huge.'

'Until the markets revive again to a level where people are comfortable, investors will keep away from the markets and will opt for fixed income and fixed deposits,' said Mr Sharma.

Analysts have downgraded forecasts for India's economy, although growth is still expected to be around 7 per cent in the fiscal year ending next March.

As a result many traders and investors in the once booming sector, who had booked luxury cars and plush apartments with bank loans, are now struggling to meet the expense of their children's education or monthly grocery bills.

'I used to drive a Toyota Innova car, but nowadays I prefer to take a three-wheeler scooter to work,' said copper and brass trader Dharmesh Dave, referring to the mechanised rickshaws that wriggle through Indian streets. '

Some experts say stock markets may rise after a year or so, if global markets stabilise, but only 20 to 30 per cent over the main index's current level of around 9,000 points. -- Reuters