Homemarket News

Millennial's perspective: Is there a disconnect between market and economy?

This article is more than 1 year old.

Millennial's perspective: Is there a disconnect between market and economy?


Despite India's GDP contracting by 7.3 percent, experts suggest that the currently market rally will not fade away quickly

Millennial's perspective: Is there a disconnect between market and economy?
Both Nifty and Sensex touched record highs on June 9, but ended lower with investors being cautious ahead of key US inflation data. A few days back, India reported its FY20-21 GDP data which contracted by 7.3 percent, the worst performance in over 40 years. Yet, experts suggest that the currently market rally will not fade away quickly.
In fact, analysts predict that the levels could be just shy of the 16,500-mark in the near term. Ever since India was caught at a crossroads with the painful SARS-CoV-2 outbreak, it has seen a very rough ride as far as the country's economy is concerned. The situation seemed extremely bleak when on the BSE Sensex nosedived 3,935 points to close at 25,981 on March 23, 2020. That’s not all, the country went into what's now known as the world's strictest lockdown, and the deadly second wave left not many families that had not suffered directly or indirectly.
Nevertheless – the question is when an institution, which is known for its impeccable record, says that the recent bull rally 'poses the risk of a bubble' (reason being put forward by the central bank for this: Liquidity and FPIs), has to be backed by solid reasoning. This was arrived at by relying on a model known as 'Autoregressive Distributed Lag'. The annual report of the central bank has cautioned against a meteoric rise at a time when the GDP contracted sharply.
It may have eroded public memory now — but back when the Delta variant (B.1.617) had not caused much of the mayhem in the country it did triggering public backlash against the central government for its complacency in handling the COVID crisis — but rating agencies, India Inc and even the World Bank were upbeat on its road to economic recovery; India's GDP growth for FY22 was being forecast at a whopping 10.5 percent, but what seemed like a historic recovery was soon washed away when the second COVID wave struck.
Data revealed that in FY21 the GDP had contracted by 7.3 percent (first annual decline since 1980-81). Despite such a downfall, an important indicator: the market cap to GDP ratio, was at a 10-year high, implying pricey asset valuations. The report said that stock prices cannot be explained by fundamentals alone.
GDP calculated through the expenditure method is nothing, but the sum total of consumption, investment, government spending and net exports (C+I+G+). Taking on board this formula, if one glances at what the RBI has stated for each of these parameters in its Annual Report for FY2020-21, it reveals why there's a disconnect between the market and the economy.
Consumption (C)
RBI's Monetary Policy Committee a couple of days back decided to withhold current record low levels of borrowing rates; 'while ensuring that inflation remains within the target going forward'. Private Final Consumption Expenditure (PFCE) contracted by 9 percent in the last fiscal. The report has attributed four factors that has had a 'cliff effect' causing the economy to dwindle, they are:
  • Impact of stringent lockdown and social distancing norms
  • Heightened uncertainty as a result of transitory and permanent job losses
  • Closures of small, micro and unincorporated businesses and wage reset
  • Discretionary consumption (read transport, hotels and restaurants, recreation and culture)
  • Private consumption is the mainstay of aggregate demand & the ‘bedrock of domestic demand’, forming about 56% of the GDP. And demand when measured by real GDP, has crashed to 8% in FY20-21. ‘This is the first contraction experienced since 1980-81 and (also) the severest ever’, read the annual report. Even government’s final consumption expenditure also ‘waned off in 2020-21’ because of ‘mounting stress on government finances’.
    Investment (I)
    India’s rate of gross domestic investment, arrived at by measuring the ratio of gross capital formation to GDP at current prices, also contracted to 32.2% from 32.7% in the immediate preceding year and initial estimates say that there’s no respite going forward. Although, the country recorded its highest ever FDI inflow of more than $81 billion in the last financial year. The report stated that ‘private investment is the missing piece in the story of the Indian economy in 2020-21; reviving it awaits an environment in which animal spirits are rekindled and entrepreneurial energies are released’.
    Government Expenditure (G)
    The report puts the onus of deteriorating fiscal indicators on ‘pandemic superimposed on a cyclical slowdown in tax revenues’ & on ‘counter-pandemic fiscal push’. Where fiscal push elevated the levels of government expenditure. Further, lender of the last resort advised the government to adhere to a clear exit strategy & build fiscal buffers. Remember, the central bank recently announced a hefty dividend of Rs 99,122 crore for the government, a much needed breather for the Government of India even as it grapples with, again, a cyclic slowdown of tax revenues. The report mentions several benchmarks which are on shaky ground. Notably, in FY2020-21 the real gross fixed capital formation (GFCF) fell by 12.4%, the PFCE shrunk by 9% and the ratio of GFCF to GDP fell by 1.6 point.
    Net Exports (E-M)
    Perhaps, this is one area where the picture doesn’t seem so bleak. Net exports contributed positively to aggregate demand in 2020-21. This was on account of higher contraction in imports when compared to exports. Remittances have fallen, thanks to the deteriorating economies of the source countries. However, the report says that the current account balance may record for the first time, a modest surplus for a year as a whole after 2003-04.
    Considering that 3 of 4 indicators that make up the gross domestic product, when calculated through the sum of all final goods and services purchased in an economy, seems to be in the negative territory, one may wonder whether markets scaling all-time highs at this juncture is a disconnect or not.
    next story

    Market Movers