Those who complain that Western stockmarkets have become disconnected from the economy should take a look at India. Prime Minister Narendra Modi ordered a very strict lockdown last spring. GDP subsequently crashed by 23.9% in the first quarter and the World Bank thinks output will contract by 9.6% in the 2020-2021 fiscal year (to 1 April 2021).
Yet the stockmarket has continued to make all-time highs. The BSE Sensex benchmark has soared by 90% since last year’s March lows and is up by 20% on pre-pandemic levels.
India’s economy had been slowing even before the virus hit, says Tish Sanghera for Aljazeera. While governments across major economies unleashed massive fiscal stimulus to cushion the shock, elevated debt levels have reduced New Delhi’s room for manoeuvre.
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Fiscal measures designed to fight the crisis are estimated to be worth just 1% of GDP. While consumers in many countries are sitting on a pile of furlough cash, nearly half of Indian households report that their incomes have fallen over the past year.
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Instead, the government has focused on reforms to labour and agricultural laws to boost the economy. India’s leaders have shown “unusual energy” in pushing through the latest reforms, says Mihir Sharma on Bloomberg. Perhaps too much energy: the government’s lack of consultation has sparked a needless backlash. Furious farmers have descended on the capital to protest against changes that would open up agricultural markets. Multiple rounds of talks are yet to deliver a solution.
A vulnerable bull market
The stockmarket’s surge is being driven by foreign investors, says Prathamesh Mulye on Quartz India. Low global interest rates and a weakening dollar have prompted a rush into emerging markets; $14bn of overseas cash piled into India during the last two months of 2020 alone.
Indeed, the local stockmarket is so “out of tune” with the economy that the Reserve Bank of India, the central bank, has warned that it could put financial stability at risk. Asian markets have raced off the starting blocks this year, says Mike Bird in The Wall Street Journal.
Yet the indiscriminate gains across markets as different as South Korea and India suggest something is wrong. Heavy reliance on foreign investment inflows could leave India’s stock rally badly “exposed” if investors’ sentiment shifts.
On a cyclically adjusted price/earnings (p/e) ratio of 21.3, Indian shares are more expensive than major markets across Asia and Europe and well above the emerging market average of 15.7. The rally may have momentum, and the longer-term outlook remains compelling, but for now it seems there is a long way down for the country’s shares.
