Modi at 3: Bullish stock market, sluggish economy
Indian stock markets are on a high. The widely followed benchmark indices, Sensex and Nifty, hit new record levels recently. The current unrelenting rally in stocks since the budget on February 1 has continued with brief intermittent pauses. Improved fundamentals, both global and local, have contributed to the current bullish sentiment. Immediate factors responsible for pushing the indices to new highs include hopes of an above average monsoon, expectations of a rebound in earning growth of corporate India and hopes of a continuation in reforms. Hopes apart, one big reason for the current surge is the global liquidity which is driving up equity markets across the globe.
The bullish trend in equities is not a recent phenomenon though. Markets have been rallying for a long time now, three years to be more precise. The uptrend started in October 2013 when Narendra Modi was declared as BJP’s prime ministerial candidate. Reinforcing faith in Modi’s leadership to bring political stability in the country and fast-track reform process, benchmark indices have appreciated more than 25 per cent since May 2014 Lok Sabha elections, thus adding 50 lakh crore to investors’ wealth. The sharp jump in market valuation and wealth creation has been termed by some market experts as the ‘Modi Rally’ which has so far not shown any signs of running out of steam.
So strong is the upward trend that markets have ignored several negatives like sluggish earnings of corporate India, slow pace of economic reforms, India’s sovereign credit rating just above the junk status, rising unemployment, jobless growth and distress in agriculture. But then equity markets generally paint a glamorous picture of economy, more so because they have come to be the barometer of the economy’s performance. Since markets are driven by several factors, including speculative sentiment, they need a reason to move up; economy needs improved fundamentals. Hence the rosy picture painted by the markets is not always the real state of economy.
Coming to power on the promise of achhe din, Modi inherited a fairly stable economy that grew at 6.6 per cent in 2013-14 and 8.3 per cent during the preceding nine years. Efforts to bring back the economy on growth path had begun a year or two before PM Modi was sworn in as the Prime Minister. But the stock market did not give it the thumbs up because UPA-2 was a coalition government that could not fast-track reforms. Hence the equity market remained subdued and moved within a range of a thousand points. One important fact which critics of the earlier government ignore is the impact of the financial crisis of 2008 which not only dented growth in developed and developing world, including India, but needed government intervention in the form of large scale quantitative easing. Such was the impact of the crisis on growth that the Indian stock market had lost more than 10,000 points on the Sensex.
Evidence of slow economic recovery in US was available in the second half of 2013 when the Fed began lowering purchase of bonds and hinted at hiking interest rates in future. Though stubborn inflation was a major concern for the Indian government then, economic recovery had also begun to happen in India around the same time. Inflation targeting, fiscal prudence and the exercise to contain current account deficit were some of the steps taken to kick start growth by UPA-2 a year before the 2014 parliamentary elections. But these efforts were not enough for the markets to respond positively. However, the sentiment changed completely when BJP got majority of its own. Ever since, the markets have been more bullish about reforms and growth than policy experts and economists.
Modi was lucky to have a windfall arising out of external factors. Thanks to the crash in prices of commodities in international market, particularly crude – which has been a big plus and which has helped ease inflationary pressure – the government has been able to manage the current account deficit and meet fiscal deficit target. This has been a big positive for the economy as well as the government which has scored political points but not done enough to drive growth to earn a higher credit rating from international rating agencies which have refused to upgrade India. If India still ranks 130th in World Bank’s ease of doing business index, it is a fair indication of the government’s lacklustre performance on reforms front. Goods and Services Tax (GST) is largely the work of the earlier government. But GST was vehemently opposed by opposition parties then. Today, transition to the GST regime has become BJP’s biggest reform.
Even Aadhaar was castigated by the BJP. So was the MNREGA. Today both Aadhaar and MNREGA are Modi government’s biggest tools to enhance financial inclusion and bring about socio-economic change. Thanks to positive macro-economic factors, the government has maintained growth momentum, contained fiscal deficit and inflation has been kept under check. But to drive growth, the government needs to act on several fronts relating to weak investment demand, fragile banking system, jobless growth and excess debt on the books of private sector corporate borrowers.
Development is assessed on several parameters. GDP growth is one of them. Other parameters are healthcare, education, employment generation, physical infrastructure, power generation, human development index and so on. Impressive growth numbers doesn’t mean much to the common man if he feels deprived of its benefits and struggles to access basic human needs. Three years is a reasonable time to judge a government’s performance. If the Modi government hasn’t done poorly, it hasn’t done good enough to deliver on several of its promises; no matter how pleased is the stock market with the Prime Minister and his government.
A government performs better in the first three years of its tenure because economics is given precedence over politics. But as compulsions of electoral politics get precedence over economics, populism drives the narrative of governance in the last two years. The case will not be different with this government either, no matter where the stock market goes on the hopes of a second term for Mr. Modi.
AADHAAR was castigated by the BJP. So was the MNREGA. Today both Aadhaar and MNREGA are Modi government’s biggest tools to enhance financial inclusion and bring about socio-economic change. Thanks to positive macro-economic factors, the government has maintained growth momentum, contained fiscal deficit and inflation has been kept under check. But to drive growth, the government needs to act on several fronts.