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On November 20, 2013, the BSE Sensex closed at 20,635. A year later, on November 19, it closed at 28032, a gain of almost 36%. How does one explain this rise? Does it reflect improving economic fundamentals or are markets divorced from economic reality?
Stock markets, according to Nobel Prize winner Robert Shiller, are driven by popular narratives and in the current global scenario India offers a new, exciting and compelling narrative – Prime Minister Modi’s promise of achhe din.
Many attributed the rally that began last year to expectations that the general elections would throw up a clear verdict. With the BJP crossing the 272 mark on its own the narrative of achhe din became conventional wisdom. It became to be widely believed, although some are now reconsidering it, that the new government, with the strongest mandate in decades, would undertake the much needed reforms to take us back to the days of 8-9% growth. Add to that the much talked about demographic dividend, the potential middle class numbering in the hundreds of millions and other ‘structural’ factors and one gets a compelling story.
For global investors, the ‘new’ India story is appealing, considering the state of the other big economies. China is slowing and Europe and Japan are in trouble. The US is the only big economy that seems to be on surer footing, although its indicators offer a mixed reading. But India appears to be in a sweet spot with growth on the upswing. For retail investors too, who have shied away from markets over the past few years, the allure of achhe din has been too hard to resist.
While there are some signs of improvement, a dose of reality is warranted. Leading brokerages have lowered their earnings estimate suggesting that the recovery is extremely uneven and patchy. Industrial growth is sluggish, bank credit is growing at its slowest pace and consumer demand is still anemic, nothing to warrant the sharp rise in the Sensex. Although one could argue that markets are forward looking, a return to the good old days of 8-9% growth is still a few years away. Citi estimates GDP to grow at 6.5% in FY16 and 7% in FY17.
Also given the mismatch between expectations of big bang systemic reforms and government policies that seem driven by the principle of incrementalism, one would expect a re-rating of growth potential which should translate to a correction. But the narrative has taken hold so firmly, it’s hard to shake off.
(The author writes on economic affairs for Business Standard)
