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Rising Market Is A 'False Positive', And Not A Proxy For The Economy.

In an uncertain economic backdrop, despairing outlook, and several sluggish indicators (revival green shoots notwithstanding), the stock markets are near all-time high.

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The stock market and the economy do not seem to agree anymore.

Watching the stock ticker, no one would believe that the economy is reeling from the pandemic, and its induced lockdown. In an uncertain economic backdrop, despairing outlook, and several sluggish indicators (revival green shoots notwithstanding), the stock markets are near all-time high.

Economy is sluggish; yet the stock market is surging

The glaring and disturbing disengagement between the celebratory market mood and the despairing economy is baffling. 

Absence of co-linearity between indices and the economy raises several questions including composition and its construct. A Crux insight titled ‘growth and market movement’ highlights that the index is no longer the economic barometer. Forty years data indicates the indices and the economy have often not moved parallelly, never in tandem. They are even detached in several cycles, mirroring the larger economic cycles in a few, and far between. 

De-licensing, market deregulation and other transformational policies & reforms like introduction of VAT, FDI, abolishing of price controls, GST, IBC etc. give gorilla gains. 

Stock market is forward looking; rising index indicates the economy could be in good health, and (but) in the future. 

Markets tell an enthralling tale; but not the full story 

The Crux study has several other explanations for the non-linearity. Index is only a tabulation of investors’ consensus view of the listed entities. Markets largely discount the unlisted, disregard the larger economic environment. Similarly, Index is skewed. Pandemic and other disruption like GST, demonetisation weakens the ‘unorganised’, and strengthening listed entities further. Index is skewed. About 40% of the Nifty consists of the BFSI sector, but its weight is no more than 15%. 

Construction, agri, manufacturing and the auto sectors which feed and drive the economy, employing over 70% are under-represented, some even ‘invisible’ in the benchmark index. Index has none of the new age service providers. The market is surging on a gush of global liquidity, propelled by low-interest rates. A rising market often overlooks, sometimes even ignores the broader economy; ‘experts’ fan the flame. Lazy money fuels risk-appetite, and plays the pied piper to the greed of the retail investor. 

Policymakers and the market pundits brandish the market as a proxy for the economy. The commentary of the policymakers’ add credence to the excitement; heightening the exhilaration. Government’s economic data is lost in the appendix. It misleads the commons when the government and its instruments rejoice ‘all time high’. So shrill is the noise that most are taken in. Economists and financial pundits should be more diligent, and push back when politicians push ahead.

Most retail investors are excited by the stock tickers, dazzled by the bouncing of the stocks. The greed, compounded by lack of financial literacy, consumes them. Many others face a grieving truth when accounts are dusted. This hurts small investors. ‘This must concern us’, the Crux study concludes.

Formally informal 

Real economy’s health is about adequate consumption, optimum investment, rising employment opportunities, efficient production and other related & aligned economic value drivers. Growing GDP is a sign of businesses doing well, and expanding; and invariably increasing valuations of the listed entities. Stock market performance and the state of the economy must intertwine, with a deeper correlation. 

India’s macroeconomic confounds even the most astute economy watcher. The ‘formally informal’ economy is complex to fathom, difficult to comprehend. Micro trends are very intricate to measure meaningfully even mystifying. Economy has metamorphosed post economic reforms, reshaped so often those indices capture neither the micro shifts & spots adequately, nor its many macroeconomic drivers.

Formalisation is a long term positive. But not now

Its time will come. Efforts & approach to ‘formalise’ has been misguided; outcome frightening. It has hurt, not healed.  Formalisation increases tax base, but extracts other cost that the unorganised can neither pay nor afford. There is more to formalisation than collecting taxes.

About 50 million informal sector participants drive 65% of the economy; employ about 80% of the labour force. They are neither robust, nor agile enough to transform and capitalise on the benefits of formalisation. Our economy has neither the enabling ecosystem, nor a sustainable platform; not even a safety net. They will fail. This will cascade a larger & longer disruption, which could see about 20% workers out of job, with no hope of getting one in the future. It will scar the poor and the middle class for life. 

The Crux study “formally informal’ across 400 policymakers and practitioners articulates that economy needs a realistic & more comprehensive index, mirroring the real economy, presenting the factual. 

Several, even persistent attempts to create SME index is still ‘work-in-progress’. Design is faulty. Framework is tedious. Government has not incentivised; instead imposed many rigid, several unnecessary regulations. Sector’s inherent challenges are ignored. Medium enterprises are opaque, lack governance. It discourages investors. Similarly lack of reliable data dissuades both the supply & demand market participants.

Listing has several intangible benefits; many other growth drivers. For one, in a capital-starved ecosystem it ease access, lowers cost of capital. Listing de-risks promoters, encourages entrepreneurships. Enterprises will engage better talent; deepen governance. Listing gives visibility to attract technology partners; and others. It will enhance competiveness, help them expand and export.

China invested and nurtured small businesses, then unleashed them to conquer the world. There is much to learn and imbibe. The government must, though its institutions invest minimal or even ‘notional’ capital, (less than 10%) for about 25000 medium enterprises and exit when they gather tailwind. The goal should be to ease several regulatory roadblocks, eliminating inspector raj, provide a safety-net.  Not fund, not control, nor manage.  Similarly the government’s ‘skin in the game’ will infuse trust & comfort for potential investors, partners and customers.

Unemployment denies, deprives 

The PM appreciates in a ‘jobless’ growth environments it is only the medium enterprises that can create jobs and satiate the educated and aspiring youth. They are the job ‘factory’, and most can emerge as ‘unicorns’ and wealth creators if the government can nurture and invest.

It’s an investment worth making.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Dr. Vikas Singh

The author is a senior economist, columnist, author and a votary of inclusive development

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