THE GIST of Editorial for UPSC Exams : 27 MAY 2019 (Market rally: Driven more by relief than optimism (The Hindu))

Market rally: Driven more by relief than optimism (The Hindu)

Mains Paper 3 : Economy
Prelims level : NBFC liquidity
Mains level : Describe the requirement of NBFC liquidity

Context

• Monday’s market rally which helped the indices post their highest single-day gains in a decade, and put the Sensex within hair’s breadth of a new high, seems to have taken even bullish market participants by surprise.
• But the market’s reaction to the exit polls predicting a clear majority for the ruling NDA, seems to be driven more by relief than optimism about India’s economic or earnings prospects.

The relief is on two counts

• One, with exit polls playing down the probability of a hung Parliament and the prolonged political haggling accompanying it, the market is betting on the new government getting quickly down to business.
• Two, with the post-poll surveys discounting the possibility of a win for the Indian National Congress, over-the-top populist initiatives such as NYAY which would have likely created fiscal challenges, may now be off the table. It’s given that exit poll predictions have been known to go even directionally wrong on occasions, retail investors should remain circumspect until the final verdict on May 23 is out.

Cautioned needs to be addressed

• The caution should be their watchword even if the final election results end up closely mirroring the exit polls.
• Trends in stock market performance after earlier general elections suggest that once the immediate excitement of the results dies down, markets turn their attention to more prosaic matters such as the economy and corporate earnings.
• On this score, the news is not good, with industrial growth floundering, consumption on a slow track and the NBFC liquidity crisis shaking up debt markets and hurting credit flow to the economy.
• India Inc’s earnings scorecard for January-March 2019 quarter has also been a mixed bag.
• Though aggregate profit growth rates are at a strong 20 per cent plus, aided by a turnaround in banking, sales growth is at its lowest ebb in the last six quarters hinting at a demand slowdown.
• With the Sensex price-earnings multiple at a lofty 28 times, India’s stock valuations factor in a 20 per cent plus profit growth not just for this fiscal year but for many more to come. There’s risk of a sharp de-rating should the actual trajectory disappoint.

Way forward

• The NDA will have to double down to the challenging task of stimulating the economy, without over-relying on the stretched fisc.
• For all its pro-business credentials, the NDA didn’t really manage to deliver on its promise of ‘minimum government, maximum governance’ in its current term.
• Even as India managed a brisk climb in the World Bank’s ease of doing business rankings, domestic businesses have complained of increasing regulatory intervention on the ground.
• Expanding discretionary powers to the taxman, ad-hoc tax demands on start-ups, frequent policy flip-flops on GST and FDI and wild card interventions in the workings of PSUs haven’t helped.
• India also remains a global outlier on high corporate tax rates. Trimming these and scaling back regulatory interventions in business are critical to acche din sustaining in the markets.

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Prelims Questions:

Q.1) Which of the following organization was founded by Gopal Krishna Gokhale as arival organization to Poona Sarvajanik Sabha?
(a) Deccan Sabha
(b) Servants of India Society
(c) Prarthana Samaj
(d) Social Service league

Answer: A
Mains Questions:
Q.1) Retail investors should stay cautious and focus on fundamentals, despite the market’s sudden spurt. Explain.