There may be something in the equity markets which traders alone may be privy to because ordinary Indians are unable to fathom the reasons for their unceasing higher trajectory despite several adverse signals emanating from the real economy. That the punters who shift millions daily with the click of a mouse on the digital platforms of the bourses are fully sold on the ‘good story’ about India may be something to cheer about, but what may be worrying is the seeming divorce of the markets from the actual state of the economy. The fact that the World Bank-IMF have lowered the growth projections from the earlier 7-7.4% to a little over 6%, the fact that the Government too has scaled down the growth estimate, ought to have been factored in by the markets. Apparently, it did nothing to dampen the spirits at the BSE and the NSE, which on Tuesday’s trading session recorded gains for the fourth successive day. The Sensex was now shy of just 1% of the all-time high.
Clearly, a major factor for the bullish trend is the money pouring in from the Foreign Portfolio Investors. After pulling out in droves a couple of months ago, the FPIs have come back with a vengeance, driving up the indices. In all probability this is the main reason for the continued spurt in prices. They are reducing their investments in China and looking at India as an attractive alternative. Given the adverse domestic and global factors for China, the FPIs find India a haven of relative peace and stability. Another reason for the bullishness might lie in the slowing growth in bank deposits due to meagre rate of interest, and as a result making mutual fund investments far more attractive than savings accounts deposits. Even post office savings schemes offer limited investment opportunities, thus making mutual funds a safe alternative to put away household savings.
Yet there are equally strong countervailing factors. Aside from the slowing economy, the pressure on the fisc continues unabated. According to a recent report in a financial daily the Finance Minister may be staring at a whopping Rs.1 trillion shortfall in the current financial year as a result mainly of duty cuts on edible oils and petroleum products. Besides, the free food distribution begun post-Covid, and the proposed cut in pump prices of petrol and diesel, may burn a hole in the budgeted targets. Also, the Government is far from meeting its disinvestment target, with the LIC stake sale alone fetching a substantial sum so far this year. (It is an altogether different matter that the retail investors in LIC have burnt their fingers badly with the share quoting nearly 40% below the issue price.) The upcoming Assembly elections beginning with those in Himachal Pradesh and Gujarat later in the year ought to burden the fisc further since the Government would feel obliged not only not to raise prices of food and fuel and other commodities but in fact to offer sops to the voters.
Yet, the Government’s management of the economy has been prudent, avoiding surprise shocks and undue demands on industry and trade. The latest figures for monthly GST collections signal a positive trend in growth. At RS. 1.52 trillion in October, an over 16% rise year-on-year, these marked the second highest ever since the launch of the GST in July 2017. Festival-related activity coupled with the increasing adherence to the e-way billing for inter-state movement of goods are reflected in the higher October collections of GST. Happily, the Government spending on infrastructure such as roads, highways, railways, etc., too has seen a welcome increase. The infra expenditure is a big driver of growth, especially in the absence of a surge in private investment in infra projects. To return to the share market surge, a main cause for buoyancy may be the fear of recession in the Western economies, lack of investment opportunities. The quantitative easing by the Fed too seems to have been factored in by the investors. Even a growth of more than 6%, when all major economies, including China, nay, specially China, are staring at lower growth, makes India an attractive investment destination.
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