Few events capture the significance of a country’s economy as noticeably as trends in the country’s equity markets. Backed by a 25% rise in key indices in the last 12 months, India’s stock markets are eyeing a fairytale all-time high in 2013 powered by an anticipated flood of investment from overseas funds who are seeking out global islands that fetch healthy returns. The Bombay Stock Exchange’s benchmark Sensex is fast closing in on the all-time intra-day high of 21,206.77 points it had scaled on January 10, 2008. The Sensex had hit an earlier all-time closing high of 21004.96 on November 5, 2010, which was then powered by a cracker of a debut by public sector company Coal India Ltd on listing after the country’s largest initial public offer. Two-and-a-half years hence Indian stocks are again set to first reclaim and then canter past the peak it had run up a couple of years ago.
Last year, global investment banking firm Morgan Stanley had projected that there is a 60% probability of the Sensex breaching 23,000 by December 2013. Its forecast was predicated upon a succession of reasonable actions: fiscal discipline, progressive rise in spending on infrastructure projects, movement on goods and services tax (GST) and gradual monetary easing. Over the last six months, the government has amply demonstrated its intent to walk the talk on fiscal rectitude. Finance minister P Chidambaram has unveiled plans to gradually narrow down India’s fiscal deficit to 3% of GDP by 2016-17. High subsidies have widened the government’s fiscal deficit — shorthand for the amount of money that it borrows to fund its expenses — limiting its elbow room to spend on investing in infrastructure and development schemes to spin jobs and multiply income. The Reserve Bank of India (RBI), on the other hand, has also cut the repo rate — its key lending rate — by as much as three-quarters of a percentage point since January.
It is sometimes helpful to carve up the economy into two slices — the real and the financial sectors — and the developments in the latter, quite often, tell us what to expect in the former. In normal circumstances, it is safe to assume that a soaring equity market would imply that the economy is going through a purple patch. But, the current circumstances are not really normal. India is struggling to claw out of a decade-low growth in the economy. Key legislations, such as easing up foreign investment norms in the country’s insurance and pension sectors are stuck in a political logjam. While the newly set up Cabinet of Committee on Investment (CCI) has taken the task of fast-tracking infrastructure projects in right earnest, slow project implementation remains a critical concern dogging the Indian economy. These kinks need immediate straightening for the real sector to sizzle and sustain the fireworks in the bourses.