Owner’s pride

Unlike the developed economies, the Indian stock market will have many triggers to sustain and accelerate gains

The equity market surged more than 2,500 points from the recent low in less than two months before pausing for breath early November and letting off nearly half of the gains thereafter. The spike in oil prices after the power grab in Saudi Arabia did raise questions about the sustainability of the buoyancy in stocks worldwide. Oil producers suffered in the years since 2008 as developed countries slid into recession or slowdown. The mixed signals emitted by China did nothing to offer clarity on the way ahead. India, another big consumer, was struck with policy paralysis since 2013, two years of drought and the roll-out of structural reforms. All these variables are not out of the question. China might not grow at the same pace as earlier but it is also not likely to fall off the map. It is understandable that West Asia wants to catch up with the rest of the world by making the most of its strength. The cutback in oil production by a section of Opec to support and boost prices will be a trigger for the Gulf region to recover from the slump. It might even gain its position as one of the important destinations for exports from the emerging markets, after the US and the euro zone. Indian exporters of manpower, merchandise and farm products and services to the region had to bear the consequences of soft crude prices. Their remittances will be valuable contributors to the reserves. Oil exporters are not likely to embark on reckless adventurism by allowing prices to go unchecked. The outcome of such a suicidal strategy is clear: worldwide recession. It might even spur renewed effort into shale-gas drilling that had tapered after the plunge in oil prices.

The market is forward-looking. Projections by multilateral institutions that the global economy is set to expand over the next two years have supported most prominent indices’ journey to historic highs. The recovery of the US and euro zone have provided fuel so far. The unemployment rate is low in both the geographies. The US market crossing new milestones is on the back of President Donald Trump’s tax-cut proposals. It might even have factored in the productivity gains of the next couple of years. The current high valuations might look reasonable in retrospect as the world sets to usher in an era of unprecedented prosperity. The crux is if these can be sustained. If the US Federal Reserve begins increasing interest rates from next month, the American economy can be considered to be into over-bought territory. Funds from profit booking are likely to find their way into fixed-income products to hedge against future shocks. Fearing pull-out by foreign investors, emerging markets might be tempted to follow the example of the Fed. The wave of higher interest rates around the world can torpedo recovery. The conclusion is that the US, the euro zone and Japan have to rely on monetary policy tinkering to drive or pull back inflation, now being considered as an important indicator of a nation’s dynamism. It should not be high enough as at to tempt consumers to stash cash in savings accounts for better returns and not low enough to discourage companies from undertaking expansion.

The striking feature is that while the developed countries might have to worry about finding triggers to keep growth intact, India should not have to face such concern. First, a buoyant global economy will propel exports, aided by a weaker rupee if short-term foreign money exits. The outflow is likely to be compensated by inflow of foreign direct investment as policy makers engage with stakeholders to climb the Ease-of-Doing-Business rankings to the 50th spot in the next two years. The Insolvency and Bankruptcy Code, the Real Estate Regulation and Development Act and the goods and services tax have set the stage for more reforms. Simplifying land acquisition, restructuring of PSUs and making labor laws flexible will nicely complement programs such as power and houses for all. The ambitious road connectivity plan supplements the GST reform. Heightened economic activity and the improvement in tax collection will allow the Central government to rationalize GST and income tax slabs and rates. The possibility of the central bank increasing interest rates if consumer price index looks up is rare at the moment. For one, the real interest rates are still around 3%, more than the preferred 1-2%.Demo has ensured liquidity in the banking system. The low lending rates have prompted companies to undertake debt refinancing and boosted buying of consumer durables and affordable housing. In fact, he creeping up of inflation will have a salutary effect on risk-taking as producers of goods and services will feel emboldened to take price hikes. A fall-out will be higher wages and purchasing power.

Mohan Sule