By Vivek Pattanayak in Bhubaneswar, December 24, 2020: In the media the headline news relating to capital market is the cause of a lot of optimism among many regarding the state of economy. Incredible rise of stock index represented through SENSEX and NIFTY breaching record will bring to those who invest in stocks and shares an understandable cheer and to traditional optimists what is called “feel good factor”.

Besides, flow of FII, FPI and FDI has contributed to this smugness in certain quarters. Many ask this legitimate question if the economy is contracting how the capital market is booming. First SENSEX is connected to market capitalization of thirty stocks and similarly NIFTY of certain number of stocks with more diversified portfolios. They do not indicate the value of Mid Cap and Small Cap.

Secondly, in the past in the early nineties and almost a decade ago similar picture was unfolding. Not that the capital market is vibrating only in India, one finds similar phenomena in the Asian markets and other markets of the developed countries including US. Almost all the developed countries have resorted to liberal bailout packages for revival of economies which have resulted in the creation of surfeit of liquidity. In the past central banks had resorted to quantitative easing creating liquid funds in the global market. Investors need safe parking of this hot money.

The Indian stock-market like many Asian market have always been treated as safe although stocks are highly priced according to many. Higher the price higher is the capitalization and higher is the index. In the past money also had come in huge volume and had exited in same manner when the better investment destination had been found. Further, stock market is sensitive to many factors like regional and global political tension, availability, and certainty of vaccine.

In India percentage of people participating in stock trade is negligible despite high saving rate although there has been recent encouraging sign of growth of Demat account possibly from the young people, an indication of increasing financial literacy. It is worth critically examining whether and to what extent flow of FDI has gone into new green field projects, to what extent it has gone towards expansion of existing projects or replacement of old equipment and machinery and to what extent FPIs have helped to create new projects. Incidentally, Private Equity flow has declined since last year. Interestingly, number of High-Net-worth Individuals has increased with galloping stock index. No wonder Piketty and Atkinson are proving right about rising inequality, a concern also shared by OXFAM.

The first quarter contraction was expectedly depressing apart from the factors like declining growth of the previous years, and more because of unyielding pandemic causing severe lockdowns. With easing of restrictions, pro-active measures taken first by the Reserve Bank of India by keeping repo-rate low, allowing the liquidity in the financial market, and keeping the growth as the focus, not inflation, and slew of measures taken by the Governments both at the central and State level, the next quarter has seen remarkable resuscitation of economy coming from perhaps from pent up demand although many have expressed doubts regarding accuracy of estimates.

What will be growth in the next quarter and in the next year there are varying estimates from rating agencies to rating agencies, from Banks to Banks and from economists to economists making one remember the famous statement of John K Galbraith, “The only function of economic forecasting is to make astrology look respectable”.

Although big businesses have posted profits in the quarterly figures mostly due to lesser out go of funds towards salaries, MSME sector still struggling has gone through unprecedented lean period of no growth, no profit, no liquidity, and many have closed, not able to revive despite bailout packages purely because the banks have not been able meet their needs for variety of reasons and poor recovery in demand. Unemployment continues to remain high with women being hardest hit since pandemic.

In this background one sees deficit in current account, import increasing, and export falling, rise in core inflation and worryingly rising of consumer price index. Although some may think Rupee rise is a sign of strengthening of economy it also dampens exports. How wise was our decision to abandon RCEP both in larger interest of domestic economy and now Atmanirbhar Bharat future will tell although we have not only distanced ourselves from a growing market in proximity but also left it to China to dominate in the background when US under so-called “friendly” administration having blocked a trade deal with us.

The States have problem of funds unable to get contributions from the Center more particularly not so good news about the Center trimming centrally sponsored schemes. There is, however, a promise of a budget “never to have been seen before” with the pressure on the Public Sector Banks to declare high dividends although private sector banks have been discouraged to do so.
In India despite pandemic the sector which defied slow down was agriculture thanks to the propitious Monsoon. The history has shown that a good harvest leads to better economy. Now with new uncertainty on farmers’ front there is reasonable ground to ruminate on how the future of economy will unfold.

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