The stock markets’ heady run has continued unabated. Records are being breached routinely, making one wonder whether they have any significance at all. The principal reason behind the large optimism — expectation of a “business-friendly” government headed by Narendra Modi — is getting well entrenched by the day even as elections are moving into the final stages.

On their part, Mr. Modi and the BJP have not done anything to temper the outsized market expectations. Although not publicly stated, the record-breaking stock indices have been interpreted as a ringing endorsement of the policies to be implemented by the BJP-led NDA. On the other side, it is also seen as a big relief — the end of UPA II with its weak governance, widespread corruption et al.

For the public at large, the USP of Mr. Modi has been that he will bring in strong governance, providing a much-needed contrast to the governance provided by the UPA II.

Even a person with very little exposure to the markets might be inclined to view the phenomenal market rise as a favourable indication of things to come. Whether that has influenced the voting pattern is to be seen. (A fanciful thought: can any one or political party drive up the markets to create a favourable opinion? Sounds too improbable, and, in any case, no one has accused the BJP or Mr. Modi of puffing the markets to boost their chances.) But the spectacular rise of the indices attributed to the imminent arrival of Mr. Modi on the national stage is certainly a bonus for the NDA. But like the inflated stock indices, is the favourable opinion of Mr. Modi ephemeral ?

Stock markets not a reliable indicator

A few important points are in order. Stock markets have never been a reliable barometer for economic policies. It is highly questionable whether the markets can, at this stage, evaluate accurately the policies to be implemented by a new government. Besides, economic fundamentals of the country might be on the mend but they hardly justify the sky-high market valuations.

The point has been made several times before that the markets have been driven up largely by foreign institutional investors, who have pumped in some Rs.80,000 crore last year. The implications of this are several. For several years now, India’s crucial dependence on these flows to bridge its current account deficit has been evident. Conversely, should India be seen as a less favourable destination compared to other emerging markets, the cross-border flows might reverse. The feared “tapering “ of the U.S. Federal Reserve might again cause a reverse flow as investors seek greener pastures in a fast-improving U.S. economy.

The whole point here is not to minimise the role of the FIIs. Rather, in a political context, it is not wise to count the quantum of such flows as a huge positive. Credit Suisse, in a report, has pointed out that only about one-fourth of infrastructure projects are bogged down because of Centre’s inaction. The rest are constrained “by over capacity, balance-sheets or state governments”. Irrespective of election results, the markets might move down quicker than what seems possible now. A report from the rating agency Crisil warns investors that India’s economic fundamentals will not rise dramatically in the short-term. According to its report, there is only a 50 per cent chance that India’s GDP (gross domestic product) will average even 6.5 per cent over the next five years and that too is predicated on a decisive mandate.

Among the ifs and buts coming in the way of a well-intentioned revival plan backed by strong leadership, the following stand out: a more flexible labour policy and deteriorating fiscal situation requiring tough discipline. Pruning down subsidies is not going to be easy at all. Tax reform of direct and indirect tax. The adoption of a Direct Taxes Code has been in the works for a long time, and the UPA II has released a draft practically on the eve of its departure. The Goods Services Tax (GST) requires a far greater consensus among political parties than what has been possible. While there are many other tasks that can be listed out, the short point is that the new government might be measured in terms of the large expectations from it. Stock markets alone are not responsible but they are, before election results, the most visible factor driving up expectations.

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