The share markets seem to be operating in a vacuum, at least independent of the general state of the economy. Look at the indices. Valuations of some of the blue-chips are at record highs. Nifty-50 index was 42 percent higher from its coronavirus lows. On Tuesday, Nifty ended the day at 10,800. This was the highest since March 6. A couple of blue chips with a high weightage in both Nifty and Sensex were ruling the roast. Nifty was trading at nearly 20 times at its one-year forward earnings. The price-to-earning ratio at over 16 times was above its long-term average. In short, markets are in surge while the economy was still to come out of the coronavirus-induced slowdown. Corporate earnings for the current financial year are certain to decline. Even for 2021-22 the chances of an increase in earnings remains uncertain. So, what is behind the endless upward march of the Nifty and Sensex? Some of it could be due to the well-planned, well-considered good cheer being managed by a couple of major players. Market mood plays a major role in how the stock markets behave. A big market player is interested in taking the price of its scrip to newer highs — and it is succeeding very well, feeding morsels of market-sensitive information in periodic doses. This is fully legit and is supposed to continue till the next couple of weeks. Aside from that, the markets have in recent years come to behave as if the economic slowdown is of little consequence since foreign investors are expected to make up for the domestic lag anyway. Inflows of foreign funds, especially at a time when there is excessive liquidity sloshing around in the US once again following the generous handouts from Washington for tiding over the coronavirus crisis, is a positive sign, though overall in recent weeks more money has flown out than flown into the markets. Partly it may be due to the fact that the domestic economy is beginning to show signs of revival after the near collapse during the stringent lockdown in April. The Purchasing Managers’ Index, which indicates the trend in manufacturing and services, rose from 30.8 in May to 47.2 in June. It was down to 27.4 in April. It should at least be 50 to indicate a positive trend but even at 47.2 in June when the economy was still struggling to come out of the clamps of the coronavirus lockdown is a hopeful sign. Again, after touching a record low in April, GST collections in both May and June were up. These were Rs. 32,000 crores in April, Rs 62,000 crores in May and in June these crossed Rs. 90,000 crores. Of course, the June collection is still lower than the pre-lockdown figure of nearly Rs. one lakh crores, but all indications are that once normalcy returns GST collections too would go up. Relevant indicators of a slow but certain revival also lie in the increase in the power uses. Electricity demand has again reached 90 percent of the pre-corona level while railways hauled goods merely six percent lower than their year-on-year average in June, though a part of it might be due to the continuing problems in the free flow of road traffic.
Having noted that, there is no denying that the fiscal deficit will remain high during the current year on account of extraordinary spending on the pandemic. Indeed, sixty percent of the budgeted full-year deficit for 2020-21 was already exhausted in the first two months of the current fiscal. Add to it the new welfare schemes to help the pandemic-distressed people. Probably the only silver lining is that for the first time in years we recorded a small surplus in current account due to lower imports and a sharp dip in the global price of crude oil. This is unlikely to last when the economy returns to normal and requires to import raw materials for the resumption of full production. Meanwhile, agriculture has been a bright spot this year with a record procurement of the Rabi produce. A good monsoon augurs well for the Kharif season as well. Still all this fails to explain the unnatural exuberance of the share markets.
