The pace of economic growth in India has slackened over the past six quarters. The economy is plagued by persistent issues such as the “twin balance sheet” problem as well as the transient but severe shocks of demonetisation and the ongoing patchy implementation of the goods and services tax (GST). Predictably, employment generation suffered from widespread layoffs across sectors this year. However, in stark contrast, the market return has been, in one word, fantastic. The broad-based large-cap Nifty is trading at all-time highs. The Nifty has risen 18 per cent since last October. Mid-caps and small-caps have done even better with relevant index returns above 30 per cent and many stocks doubling in price. The primary market has also seen plenty of activity with roughly Rs 30,000 crore being raised in initial public offerings.
But the poor macroeconomic performance has been reflected in corporate growth, which has been negative at worst and uninspiring at best. Quite apart from the low domestic demand, even export-oriented sectors such as information technology and pharmaceuticals have not delivered. Corporate India’s struggle with debt-servicing also continues. Banks are staring at a mountain of non-performing assets (NPAs). NPAs and restructured loans are now approaching 10 per cent of GDP. What’s more, NPAs are still rising and bank credit growth is in negative territory. However, the corporate bond market has picked up some of the slack and, to be sure, not all the news is bad. Inflation remains low; preliminary reports suggest tax collections are up, and despite all the setbacks, there has been growth, albeit slow. Moreover, the rising indices have created their own momentum and brought in new market participants. It is especially notable that retail investors have entered the market in droves. The bull run was driven in the initial stages by foreign portfolio investors (FPIs) but as FPI buying tapered off in July, domestic institutions and mutual funds have more than picked up the slack. The middle-class’ commitment to the financial economy also seems widespread.
Capital gains from the market may have helped to create a “wealth effect”. Despite slow growth and poor employment indicators, investor sentiment remains good and consumption has not collapsed. Indeed, there are some signs that big-ticket consumption may have revived in the festive season since vehicle sales are up, and there has been strong growth in retail credit. There are fervent hopes in all quarters that the economy is finally set to rebound. Stock valuations are currently stretched and this sort of disconnect between performance and returns cannot continue forever. Looking forward, it’s a binary situation in the long term: Either the economy picks up, or the stock market must eventually fall. Let’s hope Samvat 2074 sees the former come to pass, justifying the common investors’ faith in equity.
