There is a wave in the Indian stock market. The index continues to set a record high making Investors extremely happy. About 30 stocks have given 100% returns since February. The enthusiasm of investors can be guessed from the fact that in the first two months of the current financial year alone, 44.7 lakh retail investors have opened their accounts. So is the stock market reaching record highs the expectation of the Indian economy?
Before finding the answer to this question, we have to understand the mathematics of the stock market. The shares of a company fluctuate due to two reasons. First, what is the current condition of that company? And second, how will that particular company perform in the times to come? It is certain that the country’s economy has not even reached the level of 2019. So obviously people are investing in the hope of doing better ahead of listed companies. There are valid reasons for this thinking.
For example, right now investors are mostly investing in companies like technology, E-commerce, E-banking. Since our demand has changed and we have started buying more online, not from the side store, hence the confidence of the investors in these companies has increased. Due to this, the IPOs of some companies opened at surprisingly high rates. The history of companies like Amazon, Facebook also encouraged investors to invest money in companies like these.
But the question is, when the condition of the economy is bad, then why do investors have profits? Actually, there is more liquidity, i.e. liquidity (capital) in the market right now. Economies around the world are fighting with Corona, so central banks of all countries have increased their liquidity.
With the money coming into the hands of the business class, they have started thinking of investment. Since Real Estate does not have high returns, and interest rates in banks have also been reduced, the stock market has become the most suitable option for those seeking good returns. Indian stock market is also attracting investors because India is a big market for them. As a result, the prices of those companies have started rising here, whose future is not very clear. This is the thing we should be worried about.
In the stock market, investors of those companies remain profitable, which are assured of giving good returns in future, but investors of those companies, which are more prone to failure. The problem is that the future of a company is not that easy to predict. Some companies can be accurately estimated, but most of the buying and selling of shares is based on a lot of guesswork.
In this, the investor who can read the market will be in profit, but the one who cannot predict correctly may suffer a loss. One problem is that the price-earnings ratio (the ratio of the value of a company’s stock to the earnings earned from the stock) increases as the market rises. This is the condition of the Indian stock market right now. The biggest danger in this is that when it breaks (which is more likely), investors will suffer.
Real investment sectors may lag behind due to the current boom. These are the sectors which are the foundation of any economy. Their returns are comparatively less. That’s why people are avoiding investing in them right now. Its money is immediately going into the account of profit-making companies, which can harm the economy. For example, if we invest more in technology companies looking at the bright future, then we will definitely get higher returns, but this can affect the job creation scenario, that is, the risk is two-pronged – the economy will weaken due to lack of real investment and secondly employment will be affected.
One more thing, Indian stock market is dominated by the corporate sector. The number of such industrialists is close to five to ten lakhs. But their share in the total population of the country is only 0.1%. Clearly, this class will benefit more than the rise of the stock market. This has been the case so far, even though countries like the US have a decent number of retail investors. Due to this, the profit of the stock market is divided into many classes.
A large population in India is deprived of the benefits of the stock market. Then, when the stock market breaks down, the big investors somehow bear it, but the retail investors suffer more due to less capital. The Harshad Mehta case is a great example of this.
The government should make some efforts to avoid all this. If possible, the government should increase the tax on short-term capital gains. Not only this, transactions in the stock market, that is, transactions should also be taxed. These will discourage buying and selling in hurry. Investors who have made big investments in the hope of getting sound returns in a few days will also be forced to pull back. This will not only increase the government’s repertory, but it will also be able to spend much more money on infrastructure development.
It is also necessary to do this because as soon as there is any activity in the foreign markets, this boom of the Indian stock market may slow down. The beginning of the withdrawal of foreign investors is a big sign of this. Due to the high liquidity at this time, people are investing money in the stock market, but when they will face any financial stringency, they will not hesitate to withdraw their capital. In such a situation the market will start to scatter. That is, today’s bubble can prove to be harmful to the Indian economy in the long run. Therefore the policymakers should pay attention to this.
This article first appeared in The Live Hindustan कहीं बुलबुला न बन जाए यह तेजी on August 04, 2021.
You can find the translation of the article in Hindi कहीं बुलबुला न बन जाए यह तेजी |
About the Author
Dr. Arun Kumar, Malcolm S Adiseshiah Chair Professor, Institute of Social Sciences, New Delhi.
Watch Prof Arun Kumar at IMPRI #WebPolicyTalk
Socio-Economic Impacts of Coronavirus Pandemic
Pandemic and Budget Implementation and Way Forward