How do we get out of this Jekyll-and-Hyde economy?

Covid-19 broke into the national consciousness in the third week of March 2020. Since then, the pandemic and the periodic lockdowns have ravaged lives and livelihoods across India. Initially, the stock markets were also hit. The Sensex fell almost 25 per cent i.e., over 9,000 points when the sudden lockdown was announced, after continuously rising 20,000 points since 2015, but it recovered as Covid severity started to ebb. In December, the Sensex crossed previous peaks, to fluctuate above 40,000, even as it was forecast that GDP would contract by around 9 per cent in FY21, compared to the 8 per cent nominal growth in FY20.

March/April 2021 witnessed a brutal second wave. This came as a shock and overwhelmed the State. The panic and the grievous loss of lives that resulted are best not discussed in this column. As a result, a host of agencies, including the World Bank and RBI, have revised FY22 growth estimates downward. Several experts are talking about widespread social distress and calling for additional fiscal stimulus, including printing more money, to nurse the economy back to health. The stock market, however, seems to have either missed all this or begs to differ with these agencies and has instead wished to compete with the US stock markets. The Sensex has moved up, roaring in a bull charge all through the second wave, concurrent with and in exact opposition to the publicised economic pains of the country. It has crossed 52,000 and optimism reigns. The combined market capitalisation of India’s 7000+ listed companies now hovers around the $3 trillion range, exceeding our GDP.

Stock market experts say that the boom is reflecting revival of growth, improved performances and future potential of companies. They point to the Covid-induced cost-cutting and efficiency drives resulting in increased profitability of the top 1,000+ listed companies that have so far published results. These have, despite a combined 4 per cent decline in sales, reported a sharp 19 per cent growth in gross profit (EBIDTA) and a much higher net profit growth (some even above 30 per cent).

While it is true that several individual companies have done well in terms of increasing their profitability, it is not true for all listed companies as corporate tax collection, meanwhile, has fallen by 18 per cent. But share price increases are happening across the board. Shares of the top 100 rated companies in total cash market turnover has fallen from 87 per cent in May 2020 to around 50 per cent now. The market capitalisation of even sectors like hospitality, aviation, textiles, gems and jewellery, etc., are all attaining historical peaks, even as policy experts discuss relief measures to ‘rescue’ and ‘revive’ these sectors.

Also read: Economy likely contracted 12% in June quarter: Report

Future growth prospects depend upon capacity expansion/new projects. National Gross Capital Formation has been falling as the private sector has continuously been deleveraging after the NPA crisis. Private sector project announcements (reported by CMIE/Projects Today) have been on a downslide right from FY17, with each succeeding year being more subdued, right up to FY21. Corporate loan growth is tepid. Thus, the rate of capacity creation to support future growth has been slowing.

Why then, it will be asked, is the stock market booming? What is more real -- GDP or the stock market? It is difficult to say, but it may simply be a monetary illusion – a case of too much money chasing too few stocks, like in the heady times of Harshad Mehta in the early days of liberalisation. But unlike in the past, the fuel this time is being provided by overactive central banks. Huge stimulus/monetary bail-out packages keep getting announced in the US and EU. Interest rates are near-zero there. This excessive liquidity that is sloshing around is spilling into Emerging Markets. Huge FPI/FDI inflows have taken place. Our Foreign Exchange reserve stood at $469.9 billion on March 20, 2020. It now exceeds $600 billion, and the rupee is continuously appreciating, reducing export competitiveness.

Additionally, RBI has been taking a variety of liquidity enhancing policy measures, including note-printing, in trying to stimulate the economy, resulting in a continuous growth in money supply, unrelated to economic growth. A sustained effort to reduce interest rates, even using unorthodox measures, has also been made. Newbies are getting lured towards the stock market as bank/post office saving schemes now often earn negative real rates of interest. Last year saw a 38 per cent increase in assets managed by the mutual fund industry, topping Rs 32 lakh crore now. Demat accounts managed by CDSL have jumped from 19 million in March 2020 to over 30 million accounts now. Concurrently, there is a worrying increase in inflation. Edible oils, pulses, etc., are shooting up at high double-digit rates.

What of the future? Sooner or later, the stock market and GDP (real economy) will need to agree to inhabit the same universe. But which will go where? Self-righteous intolerance to entrepreneurial failure and regulatory activism are deterring risk-taking, capital formation and rapid economic growth whatever be the interest rate/liquidity position. On the other hand, worried discussions regarding global inflationary pressures and the need to have sensible interest rates have already begun in the US. Liquidity tapering there may create problems here. A stumble may well lead to a fall, yet it is difficult to stop dancing when the music is still playing. Authorities must consider this reality and take steps to moderate the excitement before it is too late.