Economic growth during the current year might mark the beginning of a turnaround, but the performance will most certainly not be on a scale that would justify the astronomical rise in the markets.
The stock markets’ heady run has continued unabated, only pausing occasionally to book profits. On Tuesday, May 13, yet another record was breached with the Sensex crossing 24,000 during the day. Notwithstanding such a phenomenal and seemingly irrational rise, some brokers and analysts expect the markets to go even higher. The reasons for the unbridled optimism, in turn leading to puffed-up stock valuations, are rooted in the belief that a politically stable government free from troublesome allies and capable of taking strong economic decisions under the leadership of Narendra Modi is about to take office. The exit polls released on Monday evening seemed to confirm what the opinion polls had forecast earlier. There are some fundamental flaws in establishing a causal connection between expected poll outcomes and euphoric stock markets. For one thing, while all exit polls had forecast a win for the National Democratic Alliance, there has been considerable divergence among them on the final outcomes that will be known on Friday. Experts are divided on the real value of exit polls. Besides, in the past they had gone very wrong. However, at this stage it is possible to make a minimalistic assumption that an NDA government will be formed and that it will enjoy greater political stability than what seemed possible in the recent past. But the bigger question is whether, post-elections, a stable political formation by itself can engineer a relatively swift and enduring economic revival.
If the optimistic script plays out, the new government, buoyed by a spectacular win that matches the most favourable forecasts will proceed straight away to unleash a wave of economic reforms and revive stalled infrastructure projects to kick-start the capex cycle. Either out of political compulsions or based on a considered view of the economy, the Reserve Bank of India will begin to ease interest rates. The good times on the ground will start moving closer to the stock market's expectations. Unfortunately, that scenario is unlikely to materialise. Recent news on the inflation front is not at all favourable for an interest rate cut. Also, in a scheme of reviving investment the Centre has a much smaller role than the States have. It has been estimated that the stalling of only a fourth of the mega-projects can be attributed to the Centre’s inaction. The rest are constrained by such difficult-to-solve factors as overcapacity and high levels of debt. Finally, the current market euphoria has occurred after macroeconomic stability has been reached: both the fiscal deficit and the current account deficit have been reined in. Looking ahead, economic growth during the current year might mark the beginning of a turnaround, but the performance will most certainly not be on a scale that would justify the astronomical rise in the markets.
Keywords: Indian stock markets, Indian economy, election market rallies, Indian equities, Modi rally, investment cycle, exit polls, NDA election win expectation, Sensex record high, stock market bull run