The euphoria on Dalal Street with India joining the elite group of countries with $4 trillion market capitalisation and Sensex hitting all-time record high levels isn’t a good indicator of broader economic success, argues former RBI Governor Raghuram Rajan.
In the just-released book ‘Breaking the Mould’, Rajan and economist Rohit Lamba say that the stock market offers a misleading picture of the broader economy as the big are getting bigger and small ones are getting smaller.
“For a variety of reasons, including demonetization, the pandemic and the implementation of GST, we have seen an increase in the profitability of large firms in this country, while small and informal firms are doing relatively poorly. But only the former are quoted on the stock market, which offers a misleading picture of the broader economy,” writes Rajan in the book published by Penguin Random House.
High-employment sectors with many small firms, such as apparel and leather, have shrunk since June 2016, the period just before demonetization, he says.
While explaining why he is taking a critical stance on India’s current growth trajectory even when the stock market is booming and equity investments are paying off, Rajan also attributes the buoyancy to global factors like fading fears of recession and diversion of EM flows from China to India.
“First, as we write, hopes that global growth will continue uninterrupted by recession are increasing. Across the world, stock markets are buoyant — indeed, we travel a lot, and every country’s paper has long articles on why that country is doing so well,” says the book, adding that with US-China tensions continuing, emerging-market investors want an investment alternative to China.
India is benefiting from inflows, as are other emerging markets — India is right in the middle of the pack, with South Korean and Brazilian stock returns since the beginning of the year significantly higher, Rajan points out.
With India beginning to be seen as a new kind of locomotive taking the place of China, foreign investors have poured around $16 billion on Indian stocks so far in the calendar year 2023, shows NSDL data.
On the other hand, new foreign investment in China fell to the lowest level in 25 years in the second quarter.
The Indian stock market has also benefited from the trust shown by domestic investors, led by the increasing participation of retail money through both mutual funds as well as direct equity.
Last week, Nifty scaled the 21,000-mark for the first time ever while Sensex scaled past a new peak of 70,000 earlier in the day today. But the retail lot has been minting money outside of the bluechip belt in smallcaps as well as below-the-radar SME stocks. Earlier in November, the combined market value of all listed stocks crossed the milestone of $4 trillion-mark.
Among global markets, the Indian stock market is ranked fifth in terms of market value, behind the US, China, Japan and Hong Kong.
The divergence between the market and economy was also much-talked about during the Covid pandemic when central banks’ loose monetary policies sparked a rally in markets worldwide at a time when economies were gasping for breath.
(You can now subscribe to our ETMarkets WhatsApp channel)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
