Macroeconomic data do not support a soaring Sensex

The collapse of farm prices indicates agrarian distress, demand slump

The BSE Sensex and Nifty are scaling new highs every other day though the economic landscape is not that uplifting. The Sensex crossing the 32,000 mark may enthuse expert players, but for novices it is a danger signal. The bulls have their logic. They believe inflation dipping to 1.5 per cent in June may prompt the RBI to lower interest rates. Foreign capital outflows are unlikely as the US central banker has ruled out multiple rate hikes. A good monsoon will boost farm production and kick up demand for industrial and consumer goods. And finally, mutual funds being flush with cash, won’t go on a stock-selling spree easily in the near future. But there is a second, contrarian, less optimistic narrative that says low inflation is a sign of trouble, as it points to lack of demand. The collapse of farm prices is an indication of growing agrarian distress, resulting in farmer suicides and protests. The accumulating bad loans may cripple banks. Finally, the drying up of bank credit demand means no industrial project/expansion/plant take-offs, and fewer job opportunities for youth.

The second line of argument is closer to reality because interest rate cuts may not translate into an automatic pick-up in corporate demand for bank credit. Projects do not start coming up overnight. Besides, state finances are set to worsen due to the pay commission reports and politics of loan waivers, limiting their capacity to boost industry or agriculture.