Is the Sensex telling us something?

What is the zooming Sensex telling us? The promise of a booming economy? Or is it a rapid bubbling up before an imminent burst? What about the other indicators, factors internal and external to the country? There are green shoots, but we need to tread with care

On 21 January 2021, something big happened in the capital market. The Sensex breached the psychological milestone of 50,000, though due to some profit-taking, it fell down slightly thereafter. There is euphoria in the financial circles and people are debating that the bull may touch 1,00,000 in five years. The timeline of the Sensex so far was thus:

DESPITE THE PANDEMIC

The last rise of 10,000 has been the fastest, despite the pandemic and consequent lockdowns in several phases almost throughout 2020. If the Sensex is considered as a barometer of the economy, then we should be hopeful for the coming financial year, when we may reach substantial growth in the GDP. Some think tanks have opined that it will be a double-digit growth in GDP in FY2021-22 against the severe contraction in the current financial year. It is true that the Sensex covers only 30 companies and that too with almost different weightage and hence, it may not give a correct picture of the real economy, but nobody can deny that it is an indication for the future.

OUTSIDE REASONS

Economists have related the quick rise in the Sensex in these pandemic times with external causes, such as rising liquidity in the world, and also due to several stimuli given by several central banks for helping the economy hit by the pandemic, and the arrival of the new US President. The external causes definitely have repercussions on our economy and on our capital market. It is a fact that during 2020 almost Rs.2 lakh crores flowed into the capital market through FPIs but it is debatable whether the coming of Biden as the US President has helped the market, since even Trump was good for India. The leading capital markets the world over are doing good and so there is nothing big if the Sensex has gone up so high, as is felt by some economists.

"The world has been looking for vaccines and India has emerged as one of the five countries to come with it. We have already come with two vaccines and two more are in the pipeline"

CONDITIONS WITHIN

External reasons apart, we cannot step over the domestic factors, which also had a great say in the quick rise of the Sensex. The world over, there has been praise for our country’s robust management of the pandemic. For a country of our size with its high population density, our mortality rate is the least. Our economy took a big hit when there was a sudden and total lockdown in March 2020, and as a result there was a contraction in GDP by 23.9% in the first quarter of the current financial year. But there was an amazing jump in the second quarter with the contraction limiting to just 7.5%. This means that when the lockdowns were slightly relaxed, a good management of economy commenced immediately and the same is continuing with better pace today. The second quarter GDP rise was unexpected as economists had forecasted a growth of 9% to10%. Even the RBI had not expected this.

ONE OF THE FEW

In the background of Covid-19, the world has been looking for vaccines and India has emerged as one of the five countries to come with it. We have already come with two vaccines and two more are in the pipeline. Our vaccines are not only good but also cost-effective. Apart from China whose vaccine credibility is suspect, we are one among a proud four countries in the world to possess the vaccine. Demand is coming from the world over for our vaccines for which we have received appreciation from the WHO. The vaccine will definitely have a positive impact in economies hit by the pandemic, as they eradicate the fear of the disease. The RBI Governor spoke highly about the V-shaped recovery of our economy, terming it ‘V-shaped’ meaning ‘vaccine-shaped’. Another domestic contributing factor is the third-quarter results of the companies spread over various sectors, which appear promising.

BUBBLE BEFORE THE BURST?

A concern has been expressed by some economists that our capital market is overheated, and it is something like a bubble that may suddenly burst leaving dismayed investors. The reason behind this thinking is the adverse PE (profit-earning-ratio) which is around 34 at the moment, which was around 21 earlier. Another worrisome thought is that the liquidity in the world market is bound to get reduced when central banks put a lid on the liberal stimulus outflow. There is also a possibility that the US will increase the rate of interest when things normalise, and the same will mean that the dollar will become costlier. This may result in withdrawing of investors from the emerging markets, including India, thus impacting them. The worries expressed by the economists are well founded, and they cannot be ignored. The investors in our capital market should become more careful than greedy.

On the other hand, there are economists who have expressed optimism for our share market. They rely on the fact that our capital market has a huge base of domestic investors, many of them keep on investing through SIPs in Mutual Funds and hence, a sudden outgo of foreign investors due to external reasons will not have a serious impact. It will not be a repeat of the year 2013, when our share market had a sudden deep fall due to the increased US interest rate. Anyway, investors in the share market should always remember the words of wisdom from Warren Buffet, the number-one investor in the world: “I will tell you how to become rich. Close the doors. Be careful when others are greedy. Be greedy when others are fearful.” Warren Buffet has gone ahead to create rules for capital market investors, which says, “Rule number one: Don’t lose money. Rule number two: Don’t forget rule number one”.

Carefulness is the art of dealing in the share market, as nobody can tell you precisely where to invest and this reminds me of a saying by Charlie Munger, “Tell me where I am going to die so that I won’t go there”.

"The Sensex is giving us happiness, but that is not enough. The economy as a whole should give us satisfaction "

NOT MERE SENSEX

The Sensex is giving us happiness, but that is not enough. The economy as a whole should give us satisfaction. We together with the government both at the centre and in the states, have to work hard and in unison to see India emerge a prosperous country. Due to Covid-19 and consequent lockdowns, the economy suffered and we hope that we are now at the end of the dark tunnel. Green shoots of the economy are being seen. GST collection of Rs.1.15 lakh crore in December 2020 was the highest seen. There are sectors which are witnessing improvement. There are also sectors hit hard by Covid-19 and a lot is required to be done to make them profitable.

LOOMING NPAS

The RBI, recently released the financial stability report and it expresses pessimism. The RBI anticipates that gross non-performing assets of banks may rise to 13.5% by September 2021, from 7.5% in September 2020, due to the adverse effect of the Covid-19 lockdowns. The rise in NPA may prove to be a stumbling block in the growth of the economy. We have to ensure that NPA does not rise and for that the health of banks require attention. We have to work on all the parameters of the economy like demand, supply, export and manufacturing. Our biggest contributor to the GDP is the service sector and we have to see that it moves on all its cylinders. Agriculture was not much affected due to Covid-19 but here also we have to work hard to increase agricultural income as the contribution of agriculture to the GDP is stagnating around 15% though more than 50% of our population is engaged in it.

DIFFICULT BUDGET

Budget 2021 is still a few days away at the time of writing this column, and hence the policy decisions of the government to push the economy are not known. The Budget this time is going to be the most difficult exercise after the contracted GDP of FY2020-21. Budget 2020 was presented before the arrival of the Covid-19 catastrophe and hence, it is logical to say that the revenue collection from taxes will fall short of the budgeted figure. This deficit will affect Budget 2021.

STIMULUS BURDEN

During the lockdown period in 2020, the Finance Minister announced several stimulus packages on different dates, and the same collectively will also have repercussions on the current year’s budget. To nourish the hard-hit economy, it is also expected that the Budget this year may come up with more stimuli and more capital expenditure by the government. The issue is, from where will the government get extra money? One can make a guess that a high-dose of deficit financing or Covid-19 cess may be levied. But again, this may have its own side-effects. A difficult job for the Finance Minister, but we will be able to see the medicine prescribed only with the presentation of the Budget 2021. The government will do what is best for the economy in the given circumstance. At this juncture, I am reminded of the saying by Ronald Reagan, which says, “The government’s view of the economy could be summed up in a few short phrases. If it moves, tax it. If it keeps moving regulate it. And if it stops moving, subsidise it”.