The Bombay Stock Exchange (BSE) benchmark index called the Sensex, which had risen from around 20,000 in February 2014 to 39,000 by August 2018, fell by nearly 1,500 points on one single day, 21st September 2018. It fell by a further 800 points on 4th October. The Sensex measures the average stock price of 30 of the biggest capitalist companies which are traded most in the market. The stock prices of medium and smaller scale companies have fallen even steeper.
A stock is nothing but a legal document certifying a share of ownership of the capital of a particular company. It is a claim on a share of future profits expected to be made by that company. Such claims on future profits are bought and sold in the stock market. The market prices of shares go up or down depending on the expectations of future profits. They also go up and down due to excess demand or supply of stocks at any given time. Banks and other financial companies that specialize in speculating and gambling with stocks generally succeed in manipulating expectations; and as a result, they profit even when stock prices crash, while the majority of individual investors generally end up with losses.
The decline in stock prices during September followed various adverse economic developments. These include the rapid rise in global crude oil prices, steep fall in exchange rate of the Rupee and the massive loan default by Infrastructure Leasing & Financial Services (IL&FS). IL&FS is a company owned jointly by several financial institutions, headed by the Life Insurance Corporation (LIC) of India. It has massive outstanding loans, amounting to more than Rs. 94,000 crore. The IL&FS default exposed the fact that the problem of capitalist loan defaults, leading to bad loans in the books of the banks, is much bigger than what has been revealed so far.
The most recent fall in stock prices, in early October, was sparked by the sudden outflow of foreign finance capital (see Chart).
Foreign banks and other financial institutions have been parking part of their capital in the Indian stock market. Following the surge in oil prices and steep decline in the exchange rate of the Rupee, at a time when US interest rates have started to rise, these foreign investors decided to shift their capital out of India and into the US. This led to an excess supply of stocks for sale, leading to a further steep fall in their prices.
While all these factors have played a role in precipitating the crash in stock prices, there is a more fundamental underlying cause. That underlying cause is that the steep rise in stock prices between February 2014 and August 2018 did not reflect accelerated growth in productive capital investments. The rise in stock prices was not matched by corresponding growth in the amount of capital invested and profits generated in the sphere of production and distribution. On the contrary, the rise in stock prices reflected an increase in speculative activity and profits made in financial intermediation. An artificial bubble was created in the stock market. That bubble had to burst sooner or later.
The mounting problem of capitalist loan defaults is clear evidence of serious problems in the sphere of production. When expected rates of profit are not achieved from big capital investments, more and more companies start defaulting on bank loans. It is a problem that has been growing from bad to worse for the past 5 or 6 years, ever since productive activity and investments started slowing down in various sectors.
Production of cars and two-wheelers have been slowing down while that of cotton cloth and synthetic fabrics has been declining year after year since 2013, due to the limited purchasing power of the vast majority of people. Many completed housing and other infrastructure projects have not earned the expected rate of profit in recent years. Many newly built houses and apartments in high rise buildings are lying unsold because there are not enough people with the money to buy them.
While productive activity has been slowing down or declining in many sectors, stock market prices have been rising from 2014 until August 2018. This is the result of exaggerated expectations created by the capitalist monopoly houses, assisted by the central Government. Official spokesmen as well as the economists employed by the corporate houses have been repeatedly asserting that the Indian economy is doing better than all other large economies of the world. They have been quoting exaggerated estimates of GDP growth and employment so as to deceive the people and hide the real conditions of the crisis-ridden economy.
The Note Ban of November 2016 succeeded in pushing a large amount of speculative capital out of real estate and into the stock market, which inflated almost all stock prices. In addition, lakhs of people from the working class and intermediate strata have been drawn into the stock and bond markets for the first time. The Note Ban compelled people to deposit their cash; and as banks were flooded with cash, interest rates on bank fixed deposits started declining. This situation was manipulated to promote Mutual Funds as a wise alternative for the toiling people to keep their savings.
The Securities and Exchange Board of India (SEBI) has been sponsoring a campaign under the banner “mutual funds sahi hai!” It is reported that as much as Rs. 2.8 lakh crore flowed into Mutual Funds in 2017-18, about 55% higher than in the previous year.
The investments made by the working people in Mutual Funds have fallen drastically in value in recent weeks, following the crash in stock prices. Lakhs of hardworking Indians are faced with a sudden loss of a big part of their savings.
It is a tiny minority of super-rich exploiters and speculators who pocket the lion’s share of profits made from trading in the stock market. It is they who profit from the creation of a stock market bubble. When the bubble bursts, hardworking families suffer most of the loss.
These developments once again expose the extremely parasitic nature of the system of state monopoly capitalism. It is a system in which the fate of the toiling majority of people lies in the hands of a tiny minority of profit hungry monopoly capitalists and financial speculators, Indian and foreign. The central Indian State acts to guarantee maximum profits for capitalist corporations at all times. When productive activity is slowing down or declining, the State does everything in its power to encourage speculative profiteering, including systematic deception of the people and luring them into the risky capital market.
Karl Marx on the stock market
[from Capital, Volume III, Chapter XXIX; Component Parts of Bank Capital, p.467-68]
“The independent movement of the value of these titles of ownership, not only of government bonds but also of stocks, adds weight to the illusion that they constitute real capital alongside of the capital or claim to which they may have title. For they become commodities, whose price has its own characteristic movements and is established in its own way. …
“To the extent that the depreciation or increase in value of this paper is independent of the movement of value of the actual capital that it represents, the wealth of the nation is just as great before as after its depreciation or increase in value.
“Unless this depreciation reflected an actual stoppage of production and of traffic on canals and railways, or a suspension of already initiated enterprises, or squandering capital in positively worthless ventures, the nation did not grow one cent poorer by the bursting of this soap bubble of nominal money-capital.”
In other words, the stock market does not create new wealth; nor does it destroy existing wealth. It only distributes and redistributes already created wealth.
The last paragraph quoted above means that a crisis in the system of capitalist production, resulting in wastage and destruction of productive forces, could well be the underlying cause of a stock market crash.