The bullish movement of Sensex was in total contrast of the continued decline of the country’s economy since 2017-18. The country’s GDP growth rate dropped sharply to 6.8 percent in 2018-19, five percent in 2019-20 and finally nosedived to a negative 8.9 percent in 2020, as per Moody’s. The economy is in bad shape. India’s travel, tourism and hospitality industry, which provides a rather reliable picture of the state of economy in any country, lost business worth Rs.1.25 trillion in 2020. Thousands of jobs were lost. A CARE Ratings study reports that the industry figure corresponds to a 40 percent decline in revenue over 2019. “During H2 2020, assuming the virus impact subsides, we expect FTAs to still be lower affecting the FEEs (foreign exchange earnings) by about 50 percent to reach Rs 56,150 crore vis-à-vis Rs 112,300 crore during H2 2019," the CARE report said.

Therefore, it is not surprising that Reserve Bank India (RBI) itself expressed its concern, last week, about the growing disconnect between the real economy and financial markets. In an unusually strong expression, RBI governor Shaktikanta Das said that stretched valuations pose a risk to financial stability. The RBI governor’s critical observation could not have come at a better time when Sensex was inching towards the 50,000-mark despite a grim official forecast of the economy shrinking by over 7.5 percent in the current fiscal, 2020-21. The stock market boom ignores the stress of the entire banking sector and the massive government budget deficit. “A multi-speed recovery is struggling to gain traction, infusing hope, reinforced by positive news on vaccine (Covid-19) development.

Nonetheless, the second wave of infections and new mutations of the virus have heightened uncertainty, threatening to stall the fragile recovery,” the governor said. Earlier this year, RBI deferred EMI payments for three months on all terms loans and credit facilities existing on March 1, 2020. RBI’s measures sought to ease the burden of EMI payments and liquidity concerns due to the pandemic. Now, going by the stress test conducted by RBI and other regulators, bad loans of banks may nearly double from 7.5 percent in September, 2020, to 14.8 percent in September, this year. The booming stock market totally ignores these concerns of the real economy.

The stock market’s total delink with ground realities is stark. Even the habitual bulls are worried about a possible bust. Yet, they continue to gamble with their financial investments in stocks. One reason is that there is no other market where they can more safely park their surplus funds. Funds have to be deployed. The debt market is down. Fixed deposit (FD) rates are too low. Investment in FDs offering higher floating rates could be even more risky. Stock is a better option. And clearly, stock fever seems to have gripped India more severely with fund-flush citizens than the pandemic. New investors are piling in. Local punters are crowding out foreign financial investors for the first time in decades. Assets under the management of mutual funds and other non-bank financial institutions have grown substantially.

Domestic institutional investors such as pension funds and insurance companies have become important and active players in the stock market. If compared with the price as on January 13, 2020 with that on January 14, 2021, S&P BSE Sensex grew by 18.4 percent and Nifty by 18.3 percent. Those high-moving, top-gainers during the year included Sintex Industries (gaining 461 percent), Laurus Labs (350 percent), McLeod Russel (325 percent), CG Power and Industrial (298 percent), followed by BirlaSoft, Tata Elxsi, Tata Communications, Adani Enterprises, Persistent Systems, Navin Fluorine, L&T Infotech, Strides Pharma Science, BAJAJ Electricals, Wockhardt, Aurobindo Pharma, Intellect Design, Mindtree, India Cements, Escorts Limited, Info Edge, Davis Laboratories, Alembic Pharma, Cadila Healthcare, Mphasis, Advanced Enzyme Technologies, Wipro, Dr. Reddy’s Lab, Ipca Labs, Jubilant Life Sciences, Infosys, Cipla and HCL Technologies. Are their present high prices sustainable? Only time can tell.

The lower cost of borrowing is not increasing the consumption and production of manufactured goods or helping the growth of the services sector. The level of of aggregate demand, and hence output and employment, is yet to show any strong visible improvement. Under the circumstances, few will agree that the current irrational behaviour of the market will last for ever. Current share prices do not reflect negative physical performance of most companies in terms of their earning per share (EPS). The longer the market takes to correct itself and reflect its true potential, the steeper would be its fall. Investors would bleed profusely. The bubble may not burst immediately

Before such a situation arrives, big investors — both foreign and domestic — would try to protect each other till the last. But, when it does, it may easily be the biggest market crash of the current century. Historically, stock markets crash once in seven years. The current bullish trend started since the Modi government came to power in 2014. No market intervention by the government is likely to succeed in preventing such a disaster. Many investors may slid into bankruptcy. Banks may be forced to take another hit. And, the stock market may take a longer time to recover itself to be ready for another boom. (IPA Service)