The Indian stock market is in the middle of a meltdown. The world markets are showing signs of recovering, and could stage a significant short-term rally, but no relief appears in sight for India, and the Sensex.

For six weeks, the markets have been shell-shocked, and declined. Initially, in mid- February, the argument was that the budget would be non-reformist, so sell. Then, a good budget but bad internationals, so sell. Then, a bear cartel, with circumstantial and direct evidence of "insider trading". Then, just when the bear hammering was complete - as indicated by a discussion in parliament! - came the tehelka storm. Not the mother, but the great grandmother of all coincidences. Will the government last? Maybe not, so sell. Then, came evidence of over-borrowing, insider information, illegal promoter collaboration, circular trading, price ramping by Ketan Parekh and his collaborators. The good news is that the stock market has witnessed in six weeks what most markets witness in six years, and "only" declined 10 percent since end 2000. The bad news is that confidence in the market, its operators, and regulators, is at zero, and maybe you ain't seen nothing yet.

Markets go up and down, and are fickle. We all know that. We also know that markets are more powerful than you, me, or the policy maker. This animal feeds on information, and the desires, aspirations, and risk decisions of millions of investors, in India and abroad. It is a fantastic filter, and its feedback is critical for government decisions. Even better than the press, the stock market is an instant poll on what is happening in the economy, and in politics.

Co-incident with a decline in babugiri and state control, the markets have ascended to a premier role in all economies, all markets. And market players, collectively and anonymously, are the new movers and shakers of the system. Which is very democratic, and oh so right. It is this reality which the Indian authorities need to come to terms with if they want to salvage the market, and the economy. The link between the two is ominous, and strong. And confidence is the key. A way not to tackle a lack of confidence, as at present, is to say "now that there is an accident, let us stop construction of all roads. Further, for good measure, let us break-up all the roads we have constructed so far"! Financial meltdowns have two common factors - a liquidity crunch, and a confidence free-fall. The appropriate response is to increase both in bulk amounts.

Crisis causes reforms, and this will be the biggest positive outcome of Crisis 2001. While some reforms have been announced, there is one reform which the whole world of investors is still waiting for. Genuine big-time penalties for bad behaviour e.g. insider trading. All is fair in love, war, and markets. What is not fair is insider-trading, also known as match-fixing. And penalties for such fixing have to be extreme. Try life-bans from financial markets, and when promoters are involved, their complete separation from the firm, and if necessary, delisting from the bourses. While markets may be powerful, individual players are all too human. They go for greed; equally, they do not want to risk financial ruin, disgrace, and no chance to do it all over again.

Just like a cricket match needs umpires, so do markets. Even Adam Smith acknowledged that, so the refrain cannot be "leave it to the markets". And the market players need to know that the umpire is acting in the fair interests of the game. The government has been forthright in admitting to past failures. That gives the finance minister, Mr. Yashwant Sinha, having been dealt a bad hand, to now deal from strength.

So what should he do? He should use an appropriate forum (a press conference?) to state that the government recognizes that there are structural problems, and has initiated steps to deal with the same. Conversion of the BSE from a feudal to a modern exchange; the demise of unofficial badla and the killing fields of the rogue Calcutta exchange; introduction of rolling settlements; stock options and stock futures; and expansion of institutional (mutual funds, banks, yes even co-operative banks) credit to the stock market, and explicitly into badla and ALBM.

All of this is in the near future, hopefully. But what is to be done today, now? The market needs reassurance that the skeleton box is empty, that the umpire is in control, that the match will go on, and that the good F word, "fundamentals", rather than the bad F word, "fear", will dominate investor decisions. How best to achieve that?

Not surprisingly, India is not unique to financial, and stock market crisis. After the devaluation of Dec. 21, 1994, the Mexican authorities i.e. the Finance Minister and Central Bank Governor, met with the major market players - the investors, creditors, fund managers - in New York to talk with them about the crisis, what the government was doing, listening to investor concerns, goading them not to leave, holding their hands etc.

The innovative Mexican approach is also applauded by former Finance Secretary, Montek Ahluwalia. In an excellent review and interpretation of global finance, "Reforming the Global Financial Architecture", published by the Commonwealth Secretariat, April 2000, Montek states that "a new approach, (also recommended by the Institute of International Finance), whereby developing countries can inform markets and remain in touch with them is through a structured private-official dialogue along the lines initiated by Mexico in 1996. Senior Finance Ministry and Central Bank officials hold quarterly briefings of representatives of foreign banks, equity investors, asset managers, pension funds etc.... A systematized private-official dialogue along these lines could contribute significantly to developing confidence which is an important determinant of financial stability. It also makes it possible to intensify the dialogue when the situation deteriorates and there is threat of a crisis, without creating a panic reaction in the markets. The feedback provided to the government through such dialogue might encourage an earlier recognition of incipient problems, at least as perceived by investors" (p.17, emphasis added). Incidentally, the Contingency Credit Line facility of the IMF now requires that countries should be maintaining "constructive relations" with private creditors; i.e. the whole world is doing it, the whole world is requiring this interactive thing, and the whole world is now watching India.

So what is needed today? A statement from the Finance Minister about the capital market reforms underway, and strict deadlines for achieving them. Second, that the government will not tolerate insider trading anymore, and that strict penalties will be enforced henceforth. Third, that no more will fund managers be indirectly interacted with via leaks to the press, etc. Fourth, that a system has been put in place whereby very senior government officials will hold, (and the first one will be held later this week) closed door meetings with major domestic, and international, market players to discuss the current crisis, to hear about investor concerns, to note their recommendations for reforming India's capital markets. Fifth, he wishes the investors well, and sincerely hopes that their trust will be rewarded. Sixth, he believes the trust will be rewarded handsomely. Why? Because Indian fundamentals remain amongst the most attractive, on a relative basis, on the global plate. And capital market reforms will make India a better destination for investor funds, both domestic and foreign.