Booming markets

 Stock indices touch new highs but is the market overvalued and is there a risk of a crash?

The Bombay Stock Exchange's Sensex, which is a weighted index of the top 30 scrips on the market, crossed a historical high of 35,000 a couple of days ago; the more indicative Nifty index of the National Stock Exchange that monitors the 50 top Indian listed companies crossed the historic 10800-mark yesterday. This, just days after the Government announced that it had drastically cut its additional borrowing for the year as it expected to garner more money from the Reserve Bank of India in the next few months. This would reduce India’s fiscal deficit and bring it closer to the Government’s planned limit of 3.2 per cent of Gross Domestic Product (GDP). This set off banking sector stocks and the overall market, which allowed 2018 trading to begin with the sort of bang that 2017 trading had begun with. But with the markets trading on such a high, some suspect that the market is massively overvalued and headed for a huge crash soon.

Last year, the major indices kept climbing and if people had invested in index-linked funds they would have made a return close to 25 per cent in 2017. What was peculiar to some and baffling to baiters of the Narendra Modi Government was how the markets were constantly climbing, and not just in jumps and starts, but in a sustained manner. What puzzled many was that the market growth in 2017 came on the back of demonetisation and the implementation of the Goods and Services Tax (GST), both fundamental changes to the Indian economy pushed through by the Modi Government which has effectively attempted to make the highly informal cash-driven, physical asset rich Indian economy a more formal one. Potentially one reason for the rise of the indices and, some suspect, even the huge rise in questionable crypto-currencies such as Bitcoin was the need to invest money in other asset classes such as the stock markets. That is one possibility. The other is that the fundamental metrics of the Indian economy were more positive. Also, global indices, particularly those in the United States, have been climbing substantially and despite dire warnings about Donald Trump’s impact on the economy the main US indices rocketed up in 2017.

We will know the overall state of the Indian economy when the Finance Ministry releases the economic survey in a few weeks, but other indicators have not been all that great. India is still growing at a good clip, but she faces a challenge of employing over one million youth coming into the job market every month for the next few years. With increasing levels of automation is both manufacturing and services, many economists and sociologists worry about different aspects of what they term ‘jobless growth’. At the same time, the slower pace of growth leads to less domestic demand and India’s wealth imbalance means that a very small part of India’s population is driving the economy. However, the Modi Government has bitten the bullet on many issues and has tried for more balanced growth and to spread the wealth. Will that lead to a better economic performance in 2018? The Government which is up for re-election within the next 15 months certainly hopes so. Because if the growth is absent, it will sooner or later reflect on the stock market.