Is the iceberg likely to snowball?

India's stock market Index, the Sensex fell by over 800 points on Friday, the day after the budget. This wiped $70 billion or Rs 4.7 trillion from equities. This is a small percentage of our market capitalization which reached $2.3 trillion, over Rs 150 trillion, in December. Markets rise and fall, so this should not be anything to worry about. Indians are very hesitant about investing in stocks. Most like to invest in physical assets, such as real estate and gold, while financial investments are largely in term deposits in banks, with shares and debentures constituting less than 5% of financial savings. But lately this has changed as the rate of interest on term deposits have declined and prices of real estate and gold have been falling. Financial savings increased to 8.1% of Gross National Disposable Income, investment in shares and debentures increased to Rs 1.8 trillion, from Rs 413 billion, and investment in mutual funds increased to Rs 9.8 trillion, an increase of 40%. The fall in the Sensex will alarm all these investors and if they sell in panic the index will fall more. Since domestic investments in shares is so small it probably will not make that much difference but if investors take big losses they will shun the market in future, as they used to do in the past. The government introduced a long term capital gains tax on shares, in addition to the Securities Transaction Tax, with the hope of raising Rs 350 billion extra in taxes. If share prices fall, gains will be reduced and the government's share will also fall. Businesses borrow from banks by pledging shares. Last year the value of shares pledged was only Rs 3.2 trillion in total, with no company pledging over 75% of shares. This was much better than in December 2016, because the enormous rise in share prices probably decreased the proportion of pledged shares in 2017. Banks hold pledged shares as collateral so if their value falls they ask companies to pay the difference in cash or in more shares. This is known as 'margin call'. If the promoters of the company is unable to comply with the demands of the banks the banks sell off shares to realise their capital. Selling large volumes of shares in a falling market further depresses prices. These companies are unable to borrow, so investment goes down, and banks suffer losses. Already public sector banks are sitting on non-performing assets of around Rs 8 trillion, although this is probably an understatement. T Bandopadhyay compared bank NPAs to the Titanic and hoped that no iceberg hits Indian banks. The government has dismissed the fall in the Sensex and promised to stand resolute on the new tax. Iceberg or snowball, only time will tell.