The palpable excitement at the prospect of the return of the Modi government with a comfortable majority for the third consecutive term sent the benchmark Sensex scaling a new high of 76,468 on June 3. The 3.39% rise was the biggest single-day spike in three years.
Investors’ wealth, in turn, jumped Rs 13.78 lakh crore. PM Modi’s prediction that “stock market programmers will get tired dealing with the rush post-election results, has come true a day early.
The index is an indicator that the market reposes faith in the government. This is why the indices have swung in all directions with almost all major stocks showing similar buoyancy. Institutional investors, both domestic and foreign, are counting on the expected labour and land reforms in the third term besides, of course, the continuity in policy. Given that the agenda for the first 100 days is already ready and it only has to be implemented, there is reason to be sanguine.
Investors abhor coalition governments, especially when there is a distinct possibility of the partners with vaulting ambitions bringing down their own government sooner or later. But will the party go on and on?
The answer is no bull rally is forever. Truth be told, the bear stranglehold is more long lasting when sentiments turn bleak on the back of global events as well as when the irrational exuberance gives way to a rational analysis.
Many of the scrips in the Sensex basket as well as outside are commanding price-earnings multiple not warranted by their fundamentals, testifying to the liquidity-driven boom that has by and large characterized the Indian bourses ever since the markets were opened to the foreign institutional investors.
Round-tripping with vengeance also cannot be ruled out. The fear that a large chunk of foreign investment is actually domestic black money stashed away abroad returning to India duly laundered is not chimerical.
On the contrary, it sounds very real. The black money thus returning fuels the boom of the scrips of the companies in which such Indian promoters have large stakes. The menace of round-tripping will always remain the downside of Foreign Portfolio investment (FPI) and no government at the center has dared to rock the boat lest it hurts the ruling party. Be that as it may.
The forecast that by 2027, India will be the world’s third largest economy behind the US and China is an additional impetus for the FPI but the same optimism is sadly missing when one looks at the Foreign Direct Investment (FDI) firmament. Of course, there are promises but the recent chickening out by Tesla tells a grim and real story — FDI should not be swept off its feet like the FPI. FDI takes place in the real economy which is practically irreversible. Which perhaps explains Tesla’s retreat. It is massive FDI that the country needs to make manufacturing leapfrog and provide employment to our youth. Employment provided by infrastructure projects is bound to taper off sooner than later. Sadly, we get carried away by the Sensex.
It is true the country’s stock markets have performed well during Modi’s tenure. The value of companies listed on India’s exchanges surpassed $4 trillion late last year. A few months ago, the National Stock Exchange of India (NSE) overtook both the Shenzhen Stock Exchange and the Hong Kong Exchange to become the world’s sixth largest bourse as per the World Federation of Exchanges. But then NSE attracts investors in the derivatives or Futures & Options segment which dangerously is beckoning even the small or retail investors.
The jury is still out on if share market is indeed the barometer of an economy especially when its growth is skewed by liquidity than the fundamentals. There is no way to sift the grain from the chaff but when the market booms disproportionately vis-à-vis the real economy, one is able to make a more sober analysis. Whoever comes to power, s/he must address the issues bedeviling the real economy specially manufacturing. It is manufacturing that can take India forward and address the unemployment problem. The Modi government has done well to identify semiconductor as the most important industry. It is one industry that can result in enormous savings on foreign exchange outgo.
S Murlidharan is a freelance columnist and writes on economics, business, legal and taxation issues