Weird Sensex Rise
By Shivaji Sarkar
The sudden record movement of Sensex to 36,548 points once again proves that the stock market need
not follow other economic indicators. Yes, it is rising even as consumer inflation hits a five-month high of 5 per cent in June and the industrial output growth slowed to a seven-month low of 3.2 per cent.
There is one big difference. The Central Statistical Organisation (CSO) figures are of May and the Sensex and Nifty index at 11,023 are of July 12. Has the economy started doing really that well? This is a possibility though it is not necessary that the stock market has to synchronise with other growth indicators as past experiences tells us.
Let’s look at the Sensex first. It is a narrow band of 30 stocks. The movement necessarily does not mean it is reflecting the broad movement across the market. A handful of stocks have given the cosmetic look. It is restricted to good performance of Tata Consultancy Services (TCS), Reliance Industries and some other companies, which of late had improved their balance sheet.
The Reliance hit $100 billion mid-cap and its shares are up 17.5 per cent. The TCS’ performance also improved, but this is attributed also to the falling rupee, which boosted its earning. The BSE mid-cap index shows a sharp contrast. It has dropped 12.74 per cent and the small-cap index has declined to a steeper 14.62 per cent. This speaks volumes and the trend is apparently in sync with other indicators.
The trade war and possible reopening of talks between China and the US are also said to have bettered market prospects. As trade war and oil prices have created a choppy situation across major markets, the players are moving to areas where a thin hope of gains is expected. The Indian market has once again seen the return of the foreign institutional investors (FII), which had fled to the US and western markets, between January and March, as interest rates firmed up.
Not much should be read into the latest stock movements though these are sustained for the past four sessions after a not so encouraging patch. The Nifty had touched 11,027 on January 31 but took a long time to come close to this, suggesting players are cautious and the gains are survival techniques.
The global situation remains tricky and the market would be making many corrections during the next few weeks. But this does not mean it has to rise. One needs to remember that the market is coming out of cheap money — low interest rates. Many companies that depended on cheap money may see a real squeeze.
The stock market has been supported by domestic institutional investors. They have pumped in Rs 66,000 crore, but mutual fund inflows have slowed down. The performance of some listed companies and select banks, during the June quarter, may decide the future real investment growth.
Sustaining such performance is not easy as many sectors are not doing that well. For example, sugar industry production has increased to 320 lakh tonnes and another 39 lakh tonnes from the previous season has added to its problems. The international demand for sugar has slumped. Except for China there is no demand. Many competitors, including Brazil and India, have rushed to China to sell their produce, which is causing a slump in prices.
Sugar producers too are seeing a fall in domestic demand. Even aerated water suppliers are cutting consumption as it is stated that health conscious consumers are avoiding sugary drinks. Further, unsold stocks have mounted sugar manufacturers’ arrears to be paid to farmers to about Rs 22,000 crore. The government announced Rs 8,000-crore support, but the huge backlog is more than an economic problem.
Besides, the ease of doing business is stated to have increased. But overall stiff regulations and alleged rent seeking in many areas are proving to be a hindrance. States such as Uttar Pradesh are seeing many “unlicensed” schools being closed down. Not many are eager to invest in education and such high-handed approach further dampens the spirit.
It is just not the State bodies, even the municipalities, act in a queer fashion. Some people, who try to sell fast food, come across bands of local body functionaries demanding their share or the licence, which is not easy to procure.
The nation has to seriously rethink about what ease of doing business actually means. Does a fast food-seller actually require a licence? A pragmatic approach, including on ecological issues, across all businesses, is needed for the country to thrive. It may be a good subject of study for NITI Ayog. Rising prices as the consumer index indicates may further impact demand. Rainfall deficit and high oil prices in addition may stiffen conditions.
As inflation is crossing the RBI’s tolerance limit, it has to rightfully firm up interest rates. Besides, it has to see that the banks increase deposit rates as well and not pass on losses caused by their follies to depositors. This may shake the confidence of the people in the system. A higher interest rate would also be a deterrent for the corporate. They had taken unnecessary huge loans since 2010 and thus increased rates would possibly make them more responsible.
Above all, the State has to be firm on rising prices. These should not be treated as ‘normal’ phenomenon. The falling rupee increases impact of oil prices and further weakens the currency. The minimum support price (MSP) hike for farm products is double-edged. It may marginally help the farmers, but could hit the consumers more as food grain and products become expensive, thus hitting demand. Additionally, industrial products face difficulty in selling and consequently their growth gets hit.
A prudent pricing policy is needed to boost the slowing manufacturing sector. In terms of industries, 10 out of 23 groups in the manufacturing sector showed negative growth, indicating the broad-based nature of slowdown. The best performing are the mining and electricity sectors.
Indeed, the Indian economy has many challenges to face. Some cues may be found from the UK and EU visit of US President Donald Trump. Cowering under pressure, the NATO allies have increased their spending. As Trump goes on to talk with many of them, new signals could be found. He may initiate a new series of discussions with India on Iran and Afghanistan. The international scenario is under cloud but the US’ audacity has its answers in Trump dialogues. May be the future for India would be better, but it has to check the prices to ensure growth.—INFA