Get On With Reform of Banks’ Bad Debts
On August 1, the 30-share BSE Sensex closed at a historic high of nearly 32,600 points; the Nifty 50 closed at a record 10,115. As markets shut on Friday, August 11, both indices had been beaten down: the Sensex by 4.3% and Nifty by 4%. Should we worry? Some analysts say that the market had overheated – in eight months, equities had shot up nearly 20% --and a cooling off was due. This is partially true. The exuberance was also justified by factors like the BJP’s victory in Uttar Pradesh. It was assumed this victory would give the Modi government political heft to carry out dramatic reforms. There were also hopes of a turnaround in corporate earnings, which have been belied. The price-earnings (PE) ratio shows whether stocks are priced reasonably or not. The PE ratio for the Sensex is now 23.6, a historic peak that overshadows the 22.61 number of 2007-08, before the global financial crisis broke. The trigger for Friday’s fall is an admission, made in the Economic Survey Part II, that growth is likely to fall below the projected 7.5% rate. Yet, India’s medium-term prospects are indisputably bright. We believe governments should interfere minimally in market operations. But it is responsible for reforms and policies that encourage investment, jobs and growth.
The rollout of GST, despite its imperfections, is a positive. But a fiscal deficit around 3.2% and inflation under 4%, point to deflationary risks. One negative effect of demonetisation has been a wave of write-offs of farm loans by state governments. This is expected to knock 0.7 points off growth. The government must tackle the bad debt problem in our banks, and create jobs – by supporting labour-intensive activity – for our restless youth trying to enter the employment market.