Giddy heights

Indian cricket and the stock market both achieved new heights of performance last month. Since then, the cricketers have come back to their normal form "" losing more than winning matches "" but the stock market has climbed ever higher, like one of those balls hit hard and high by Yuvraj Singh. Not only have share prices and the cricket team gone their different ways, the stock market seems to have parted company with the real economy too. Surveys of CEO opinion and of the business mood have shown a clear dip in recent quarters, and credit growth has slowed to a crawl; now it turns out that downgrades by credit rating agencies have outnumbered upgrades for the first time in something like five years "" always a sign of stretched balance sheets, though in this case some of the downgrades are because companies have taken on a lot of debt to finance their acquisitions and the trouble could mean nothing more serious than corporate hubris. Still, the Infosys results for the latest quarter are a bit of ho-hum, being nothing much to write home about. And most forecasts of economic growth this year have come down a notch or two from what has been achieved in the last couple of years. And yet, stock prices keep climbing.

The optimists point out that the price-earnings ratio of Sensex stocks, hitting record levels at a multiple of about 26, are well short of what prevails on the Shanghai stock exchange. But if that argument were to be taken to its logical conclusion, the Sensex should soon be ruling at 30,000. Even raging bulls have refrained from making such a forecast, though there are some who already see the index nudging its way towards the 20,000 mark "" which, if elevation were to be counted in feet, would really mean Himalayan heights. More pertinently, let it be noted that the index has signalled a quadrupling of stock prices during the three-and-a-half years of the Manmohan Singh government. It is far from clear whether the aad aadmi has benefited from UPA rule, but the small minority with money in the stock market has never had it so good "" and the gains on the market are mostly tax-free to boot (another gift of this government). The economic reforms that the government has sought to introduce may have been stymied by Prakash Karat, but he has had no impact on the market. The reforms, if they had gone through, would probably have helped the aam aadmi, whereas the stock market benefits only the rich because Mr Karat and Co. have not allowed the employees' provident fund to invest in and benefit from the greatest bull run this country has seen.

If truth be told, stock prices have as much or as little to do with the reform issue as they have with cricket. What has mattered more is that macro-economic management has been competent (the budget deficit has come down, inflation is low, growth is high...). But more than that, stock prices in recent months have been driven almost entirely by global currents. The big investors this year have been the foreign institutions who, being professionals in the field, are expected to know what they are doing. Whether that is true or not, they have certainly confused the Reserve Bank, which struggles to cope with the challenges of monetary management, currency values, liquidity control, interest rate psychology, asset bubbles and businessmen's animal spirits "" helping thereby to keep this editorial page alive with vigorous debate on the different options. Trust economists to provide the dark lining to any silver cloud.