Maoist Conflict Threatens Indian Stocks

The shock waves from India’s Red Corridor failed to dampen bullish sentiment as the Indian stock market began celebrating key year-on-year data yesterday. Maoist guerrillas blew up railway tracks, burnt down train stations and destroyed transmission towers across the states of Bihar, Jharkhand, Orissa and Chattisgarh. But the Sensex index still surged past the 17,000 mark on impressive industrial production numbers.

Industrial output grew by 10.4% in August (year-on-year) as stimulus money revived demand for household goods and cars. “Foreign institutions have invested more than $12 billion in the Indian stock market during the first nine months of this year based on valuations,” said a senior officer responsible for foreign accounts at Citibank, Mumbai. “With blue chips yielding as much a 17% return for the third-quarter period, we expect sentiment to remain positive well into 2010.”

With the Indian government preparing for a full-scale assault on armed combatants across the Red Corridor within weeks, it is difficult to see how foreign sentiment will remain positive. The Indian Prime Minister has publicly acknowledged that left-wing extremism is the biggest threat to national security. “The Maoists have refused to come to the negotiating table, so we have no choice but to launch military operations now,” the head of the Interior Ministry declared at a press conference last Friday. New Delhi expects to deploy at least 30,000 highly-trained forces, in addition to substantially upgrading local police capabilities.

Will a prolonged war of attrition in the Red Corrider - stretching from Maharashtra and Andhra Pradesh in the West and South to Bihar and West Bengal in the North and East – slow foreign fund inflows to a trickle and, in fact, create waves of profit-taking during periods of intensified conflict? In all likelihood, foreign asset mangers will look for guidance to multinationals committed to making direct investments in India, particularly those companies whose projects are located in heart of the zone of conflict.

General Electric (GE) plans a massive $600 million plant to manufacture diesel locomotives in Bihar’s Saran district, which borders areas heavily influenced by the Communist Part of India (Maoist); while the official version is that the project was placed on hold due to uncertainties governing the last general elections, it is common knowledge that GE’s public sector partners are reassessing their strategy in a region which is historically both, resource-rich and poverty-ridden.

Last month, executives of Areclor Mittal (MT), the world’s largest steel producer, leaked news of a decision to abandon $20 billion worth of steel projects in Orissa and Jharkhand due to difficulties in obtaining suitable land. “In reality, Areclor Mittal was highly uncomfortable with the ongoing tension on the ground,” said MT's local agent standing near a town hall which was attacked by Maoists (also called Naxalites) the previous night. A Canadian mining company, citing prohibitive “security costs”, has recently made a decision to sell its stake in two large iron ore mining concessions along the Chattisgarh-Orissa border. And few doubt that, despite the impending government offensive, the list of departing foreign companies will keep growing in the foreseeable future.

Intelligence estimates of hard-core Maoist numbers vary, from a low of 7,000 to a high of 30,000; but district-level paramilitary commanders are alarmed by the fact that guerrilla leaders can easily muster 200-500 poor farmers and tribal youth each time they decide to attack a police outpost or railway station. “We have come to expect reports of a fresh wave of such attacks in the daily morning news bulletins,” said a Mumbai-based analyst for a New York investment bank. “It is impossible for sentiment not to be effected when a mini-war is in progress in the Indian hinterland,”

For the present, however, the bullish sentiment is intact, barely, and international fund managers are regarding the dangers of left-wing insurgency as part of the risks associated with the hunt for spectacular gains in emerging markets. After all, India is not, by any measure, on the verge of a communist revolution. On the contrary, the challenge is more commercial in nature. Will the Maoist ability to regularly wreck havoc on the communications infrastructure – railway lines, transmission structures and roads (blockades) – dampen direct foreign investment in the vast Red Corridor and push equity traders to book profits whenever the Sensex index scales new heights?

Disclosure: Short INP, MT and PIN

Comments

[Uppai Mappla:]

This Maoist uprising, bloody though it is, attempts to address in a crude way the terrible inequalities of rural India. It is a sign of the rising awareness among the oppressed. Kerala went through this phase 45 years ago and came out with a higher human development index and equitable distribution of wealth. The rest of India is now catching up. The poorest of poor have been kept ignorant and bonded by upper castes for centuries. But now the oppressed are hitting back and it is an irreversible process. The author laments that villagers are helping the Maoists. Let him ask himself why the normally docile villagers should set about derailing trains and killing officials. A wise government will not set the army upon them but address their needs which will bring them into the mainstream.
Such aberrations will not affect India’s long term growth or cohesiveness. For the last 60 years, political pundits have been predicting doom for India at every tragedy but the reverse has happened. India is getting internally united and stronger than ever before. India is used to disasters, both man made and natural. India has survived the partition, Khalistan, Al Qaida, Hindu militancy, floods, earthquakes…. If history is any guide, these are not going to affect the country’s economic growth.

Oct 14 01:38 PM

[Rakesh Saxena:]

Just by way of clarification, I am not "lamenting" anything. I am only trying to identify if the forthcoming government offensive will create concerns amongst foreign investors and, if so, to what extent. - Rakesh


On Oct 14 01:38 PM Uppai Mappla wrote:

> This Maoist uprising, bloody though it is, attempts to address in
> a crude way the terrible inequalities of rural India. It is a sign
> of the rising awareness among the oppressed. Kerala went through
> this phase 45 years ago and came out with a higher human development
> index and equitable distribution of wealth. The rest of India is
> now catching up. The poorest of poor have been kept ignorant and
> bonded by upper castes for centuries. But now the oppressed are hitting
> back and it is an irreversible process. The author laments that villagers
> are helping the Maoists. Let him ask himself why the normally docile
> villagers should set about derailing trains and killing officials.
> A wise government will not set the army upon them but address their
> needs which will bring them into the mainstream.
> Such aberrations will not affect India’s long term growth or cohesiveness.
> For the last 60 years, political pundits have been predicting doom
> for India at every tragedy but the reverse has happened. India is
> getting internally united and stronger than ever before. India is
> used to disasters, both man made and natural. India has survived
> the partition, Khalistan, Al Qaida, Hindu militancy, floods, earthquakes….
> If history is any guide, these are not going to affect the country’s
> economic growth.

Oct 14 02:03 PM

[Uppai Mappla:]

Rakesh: You are right. I retract the word "lamented" with my apologies.

Oct 14 02:17 PM

[Mrudula Shah:]

Uppai,

You state that a wise government will not set an army upon them and should address the needs of the poor. Rakesh has stated that the government did try to negotiate but the communists rejected and instead have been going on an indiscriminate rampage to destroy public facilities. For your information, I did work for the governemnet in India for 9 years and have known that the Government of India (GOI) has been focussed sincerely on lifting up of the poors and eradication of poverty, following the Gandhian philosophy. Tell me a single country in the world, including the U.S., that is as dedicated for doing so much for the poor than India. Remember, India had been a poor country with limited resources for several decades after it became indepedent, and until recently, and had to allocate funds for various areas of its developmental priorities which certainly included major funding for the poors and eradication of poverty. In fact, the Planning Commission is mandated to keep that focus. As a result of the government's sustained efforts, a lot of the poors in India, for the first time in the history are seeing a brighter future for themselves. Yes, the number of poors may not seem impressive to you, but with increasing population (from 300 million after independence to currently 1.2 billlion), the percentage of the poor has been brought down substantially. I suggest you read India's Century, a book written by Kamal Nath (a Tata McGraw Hill publication). Mr Nath, an Oxford graduate, a real patriotic guy winning elections from a poor district in M.P., is a dedicated Congressman and currently a minister in the central government who was Secretary General of the Congress. The information and explanation given in the book will convince you to change your impression about the government's lack of compassion for the poor. Kerala has been a communist state, of course very well run by them. But, the nature of problem there (and even in West Bengal) are not the same in the northeastern states where the communist/Naxalite exist currently. Believe me, the GOI is doing everything it can to handle their affair as wisely as possible. Please also do not forget that the GOI has to deal with perhaps the Chinese interference in the country's affairs there and I will not be surprised of Chinese hand in the trouble with Naxalites and terrorist communists. Perhaps, it's China's intent (and perhaps their secret policy) to create difficulties for India through such means, as is evident from their support to Pakistanis and Kashmiris. It's all designed by the Chinese perhaps to develop road blocks for India against its progress towards being a competing super power.

Oct 14 06:06 PM

[Uppai Mappla:]

Mridula:
My suggestions were based on painful experience. When I was young and green in the early nineties, I was in charge of allocating rice and wheat for PDS (i.e. rations for the poor) at Ministry of Food, GOI. Just a random example of the corruption among politicians: the wheat allocation to Nagaland (a remote north-eastern state) seldom used to reach them due to logistic reasons. FCI would report something like 20% delivery but Nagaland govt would claim 100% offtake! Then I received a letter from Nagaland CM addressed to Union FM demanding 6000 tonnes of additional wheat to distribute among the poor. And the Union Food Minister had scrawled on the margin "Allocate immediately." As a loyal government servant I was supposed to immediately issue allocation telex. But I had too much data. I dared to put up a note mentioning the anomaly and that previous month's allocation had never reached Nagaland. I linked and cross-linked all relevant files and papers. When the file came back after a day, the entire note sheet had been removed and full allocation had been approved again. The allocated (highly subsidized) wheat would never leave Delhi but would be distributed among rollar flour mills. I can give you dozens of examples like this.

This kept happening in the remote north eastern states and states like Orissa, Bihar etc, where the poor were mostly illiterate. Now the poor have been aroused and they are asking questions the only way they know. I wish there were a Gandhi, not a terrorist to guide them.

Oct 15 08:11 AM

[Rakesh Saxena:]

Good debate, Mrudula-Uppai, though I'm not sure whether I want to engage in a political analysis in this forum. Both of you are making valid points.- Rakesh


On Oct 15 08:11 AM Uppai Mappla wrote:

> Mridula:
> My suggestions were based on painful experience. When I was young
> and green in the early nineties, I was in charge of allocating rice
> and wheat for PDS (i.e. rations for the poor) at Ministry of Food,
> GOI. Just a random example of the corruption among politicians: the
> wheat allocation to Nagaland (a remote north-eastern state) seldom
> used to reach them due to logistic reasons. FCI would report something
> like 20% delivery but Nagaland govt would claim 100% offtake! Then
> I received a letter from Nagaland CM addressed to Union FM demanding
> 6000 tonnes of additional wheat to distribute among the poor. And
> the Union Food Minister had scrawled on the margin "Allocate immediately."
> As a loyal government servant I was supposed to immediately issue
> allocation telex. But I had too much data. I dared to put up a note
> mentioning the anomaly and that previous month's allocation had never
> reached Nagaland. I linked and cross-linked all relevant files and
> papers. When the file came back after a day, the entire note sheet
> had been removed and full allocation had been approved again. The
> allocated (highly subsidized) wheat would never leave Delhi but would
> be distributed among rollar flour mills. I can give you dozens of
> examples like this.
>
> This kept happening in the remote north eastern states and states
> like Orissa, Bihar etc, where the poor were mostly illiterate. Now
> the poor have been aroused and they are asking questions the only
> way they know. I wish there were a Gandhi, not a terrorist to guide
> them.

Oct 15 08:57 AM

[James Lewis:]

India needs to reform and develop its corruption just as other neighbours in the area have to. India however has at its source an idealogical and moral ethic structure that is peaceful. I really hope that more devote Hindus can penetrate the government and take India on the path the world needs. After all a strong, safe equal and developed India is what the world, especially the East needs.

Mr Shah assesment of the Maoists motivations, resource origin and support seems to be very accurate. And I hope that India can use a two-toned approach whereby it resolves the problems that are causing disccontent with policy deicisions (ie making free zones that foreign companies can benefit from to develop local area), whilst at the same time sending 50 000 troops to show force. The deployment of the troops and making it clear policy will be focussed to alleviate the suffering will break the Maoist stronghold.

The question is though, can something like this occur with the very inefficient beaucracy and squabling.

Oct 17 02:39 AM

[Michael Clark:]

These equalities exist in all of Asia -- and in all the world to some extent. But in India and Thailand, China and Vietnam, these inequalities have led to some political violence and, especially in Thailand, the rise of a 'rural political party' that ruled the country for a time being, and used demonstrations to shut down the international airport 6 months ago. The urban elite are getting richer; but the rural poor are getting angry.

On Oct 14 01:38 PM Uppai Mappla wrote:

> This Maoist uprising, bloody though it is, attempts to address in
> a crude way the terrible inequalities of rural India. It is a sign
> of the rising awareness among the oppressed. Kerala went through
> this phase 45 years ago and came out with a higher human development
> index and equitable distribution of wealth. The rest of India is
> now catching up. The poorest of poor have been kept ignorant and
> bonded by upper castes for centuries. But now the oppressed are hitting
> back and it is an irreversible process. The author laments that villagers
> are helping the Maoists. Let him ask himself why the normally docile
> villagers should set about derailing trains and killing officials.
> A wise government will not set the army upon them but address their
> needs which will bring them into the mainstream.
> Such aberrations will not affect India’s long term growth or cohesiveness.
> For the last 60 years, political pundits have been predicting doom
> for India at every tragedy but the reverse has happened. India is
> getting internally united and stronger than ever before. India is
> used to disasters, both man made and natural. India has survived
> the partition, Khalistan, Al Qaida, Hindu militancy, floods, earthquakes….
> If history is any guide, these are not going to affect the country’s
> economic growth.

Oct 17 05:56 AM