India’s markets and the economy

There are plenty of reasons for feeling happy, even euphoric. By Friday last week, the stock markets had revived – after initially slumping. The BSE Sensex had crossed the 60,000mark, to rest at 60059.06.

Last week, these columns showed that the job scene in India had begun ticking. But the total fresh employment from 2013-14 to 2020-21 stood at just seven million. India needs at least 12 million new jobs to be created each year. The backlog is daunting.

Then there was good news for most Covid-afflicted people. The Supreme Court ordered the government to pay a compensation of Rs 50,000 to families for every life lost to Covid. The payment has to be made irrespective of whether Covid was mentioned in the death certificate or not. That will actually bring cash into the hands of people who were savagely afflicted by Covid deaths.

Putting money in the hands of rural folk could trigger a huge consumer wave. That would be good both politically as well as economically. With banks giving a negative rate of interest (interest minus inflation), many will buy goods. Some may get into stocks. But that will take some more time.

Loans to individuals began soaring. This was despite credit offtake by the corporate sector not taking off as expected. Most of the loans were for building homes, or for personal items of consumption. That could bring some cheer to the forthcoming Diwali and Dussehra. For two years, the most popular festival in India has been subdued. Maybe, things will turn around for the better this year. That could trigger demand for many household items. After all, new homes need a variety of things to make them liveable – right from pots and pans to furniture.

But loans can be messy – especially the buy-now-pay-later (BNPL) seductions. This is an excellent market strategy when the economy is on the upswing. Yet, that cannot be taken for granted right now. True, Moody’s

Investors Service changed its outlook on India’s sovereign ratings to stable from negative. But it has retained its rating at ‘Baa3’ -- which is the lowest investment grade, just a notch above junk status.

This is also evident in the freight indicators. But ocean freight needs to grow faster. More than threefourths of global freight is by ships. Hence, port freight remains a crucial indicator to an upwardly mobile economy. That has yet to happen.

There are two indicators that appear quite worrying.

The first is the revelation by UNESCO’s ‘2021 State of the Education Report for India’. It pointed out that almost 19 per cent or 11.16 lakh teaching positions in school remain vacant. Almost 69 per cent of them are in rural areas.

The government itself was forced to admit before Parliament (Lok Sabha) that there are 92,275 government schools with just single teachers – teaching in them at both the primary and secondary levels combined. That could puncture the balloon of a resurgent economy. Without education (and health) India’s biggest resource – its demographics – could end up becoming a huge liability. The second indicator which should make market bulls a bit wary are indicators suggesting a hyped-up market.

Then take the poor job formation numbers, and you realise that there is a need for all these factors to be addressed simultaneously.

Do study the chart above. The market-capitalisation-to-GDP number could soon dwarf earlier peaks.

When this number goes out of sync with ground realities (which is what the GDP number indicates), the fall can be precipitous. This could put a spanner in the government’s ambitious disinvestment programme on the one hand and could leave small investors with a rotten feeling of being let down.

The government needs to quickly rein in the capriciousness of the SEBI, the RBI and the NCLT and make the markets more attractive for promoters and investors. Driving away startups like Freshworks to the Nasdaq is not a vote of confidence, though some Indians may see this a good cause for chestthumping. The government also needs to ease the tensions that it has itself created – both in the northeast (where one chief minister even said that the courts need not be heeded), and on the farm front.

It needs to create more medical seats, and work on ways to improve the quality of education at schools.

If the GDP begins climbing, the stock market peaks (as a percentage of GDP) will cease to matter, as the peaks will get muted. GDP and per capita incomes are the key indicators that matter. If they are not boosted, there will be immense pain.

For two years, the most popular festival in India has been subdued. Maybe, things will turn around for the better this year. That could trigger demand for many household items. After all, new homes need a variety of things to make them livable – right from pots and pans to furniture

THURSDAY'S SWIPE

The author is consulting editor with the FPJ