August , 2017
Is India’s soaring share market an index to the real economy?
14:38 pm

Kishore Kumar Biswas

The stock market prices are rising to record levels. Reports show that at 32,000, the Sensex traded at 18.5 times the estimated one-year forward earnings. A comparison with the prices of stocks with those of emerging markets as a whole shows India has become relatively less attarctive now for the investors.So one has to think of some of the sectors of the economy and decide how far the rising stock market prices are indicative of the trends in the real economy. When the economic indicators of a country are strong, the stock market will rise. In the case of India, many economic indicators are not very promising. A few weeks ago, the former prime minister, Manmohan Singh criticised the government’s economic policy by saying that the Indian economy is now depending, mainly, on government expenditure. It is true that infrastructure- related sectors and a few others are doing well. Additionally, prediction of normal monsoon, positive impact of the GST, some sectors related to metals, and performances of finan-cial sectors may have positive impact on the stock prices. But there is a vast majority of areas which raise concern. Discussed below are some of the concerns.

Capital formation

Coming to the investment scenario, the Indian economy is passing through a low capital formation phase. In other words, there is a dearth of new projects or capacity expansion of already existing projects.  About a month ago, the reporter had to meet and talk to a number of big banking personalities. In course of discussion, the lack of new investment projects came up. A few bankers asked about the information on new genuine investment projects of even as low as ` 10 to 20 crore. The banks have huge money but genuine investors are not coming forward to invest. Some of the bankers were mainly concerned with the investment scenario of West Bengal. They also aired their concern about the poor investment situation in India. It is true that the ingestible money of the corporate mopped up through the bond market is increasing. But the growth of loan for non-food investment demand is as low as less than 8%. This is particularly severe in the case of MSME sector, which is very employment- intensive.

Export sector

The export sector has been rising for a few months, with a low base. Sales increased mainly for engineering goods (14.78%), petroleum products (3.6%), organic and inorganic chemicals (13.2%), rice (27.29%), and marine products (24.27%). But at present, the export growth rate is slowing down.

Employment scenario

During the last three years, India’s employment scenario has not been at all impressive. A few days ago, NITI Ayog released a report by its task force on employment data under the chairmanship of Arvind Panagariya. But the report is not very suggestive of overall employment generation in the economy. Notably, the employment scenario is one of the most important fundamentals of an economy. The opportunity of having employment or livelihood is an important and justifiable demand of the citizens of a country. The permanent nature of unemployment of youth and more especially of the educated youth is the biggest curse of India. The rising income inequality has been claimed to have intensified leading to growing social unrest in the country. When the new government under the leadership of Narendra Modi came to power, there was optimism among a section of people about having greater job opportunity. Modi was successful in projecting himself as a leader with a new vision of forming India into an advanced country. The high profile programme, “Make in India”, was projected not only as a slogan but as an avenue to high employment generation. The last Congress-led union government was defeated, as is thought by many, due to major issues like corruption and policy paralysis of the government. But what is happening now? The most domi-nant indicator of eco-nomic performance, GDP is not as high as was projected by the aspiring government sources. The average growth rate in the last three years of the Manmohan Singh go-vernment, considering the new measure, is higher than that of the first three years of the Narendra Modi government.

The newly initiated Periodic Labour Force Survey by National Sample Survey Office will be able to offer reliable data on employment in two or three years. But some of the other measures may help us to get an idea of the employment scenario. Professor Himanshu of JNU (Jawaharlal Nehru University) New Delhi, has remarked in his recent media article that where the RBI is facing trouble in counting the exact number of notes in circulation, how can one expect the employment scenario to be projected easily?

Himanshu mentioned some estimates which show that employment has really fallen in the recent period. The labour bureau survey has projected a decline of 1.6 million jobs between March 1, 2014 and July 1, 2015. The Consumer Pyramid Surveys of the Centre for Monitoring Indian Economy has projected a decline of 1.5 million jobs during the first few quarters of this year. Himanshu wrote that these two are very large samples, larger than NSSO samples as all these are household surveys. Another survey, the enterprise survey of labour bureau has also confirmed a slowdown in job creation from an average of 600,000 per year to only 135,000 in the first year of the government. It cannot be denied that the employ-ment situation has recently been harder hit due to demone- tisation. Himanshu has categorically mentioned that the present data on low inflation, low manufacturing sector growth, and low credit growth to industry suggest that there has been a severe demand problem in the Indian economy.


Is the Indian stock market creating a bubble? It is not very easy to answer. But at the same time a question has been raised by a section of analysts observing the stock market. The government denies this. According to it, the high rising of stock indices is the result of the strength of the economy. 

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