Three weeks into the new-year 2018, the Indian stock market is still scaling new peaks. Meanwhile, Jeremy Grantham, an American “value investor” earlier predicted a stampede upwards in the US equity market too. Bill Miller, another noted US investor thinks if the US Treasury yield rises to 3% from a recent 2.53%, the American equity market could go up another 30% from present levels. This happy upsurge is fashionably being termed a “melt-up”, to be followed, says Grantham, by a steep fall—classic melt-down. However, with the American economy growing strongly, this may not be coming anytime soon. Grantham also thinks the big money to be made now is in the emerging markets.
India has been plotting its own course lately, powering ahead as one of the best performing emerging markets in 2017. And this, not just on the back of the $15 billion, or so, of annual Foreign Institutional Investors (FII) money, as in years past. This time, it is its own domestic flow, largely from local Domestic Institutional Investors (DII) and millions of retail investors. The latter is largely using the mutual fund route, which seems to have come of age after over 20 years of trying. The balance achieved by domestic investment is reducing volatility, because the FIIs now need far more than the smallish allocations it makes every January in order to dominate. The debt market too, is perking up, after the government announced a reduced new borrowing programme of Rs 20,000 crore, in place of the expected Rs 50,000 crore.
To the more holistic, less technical thinking of the investing public, the daily tickertape analysis that indicates a sturdy bull market is because of the accumulation of relentless modernity being engineered by the Narendra Modi government. For that matter, the global economic cycle seems to have also turned for the better. This, after the ravages of 2008, of grappling with a massive debt overhang and recession. The recovery in Europe and America also has its own beneficial knock-on effect in India. The No.2 economy, that of China, the second biggest after the US, has meanwhile done little to tackle its massive debt, largely in opaque domestic sectors of its economy. And despite its world domination ambitions, its economy is definitely slowing down. Here, if there is a big, uncontrolled, melt-down, it would trigger a worldwide recession afresh. A Taleb-style Black Swan therefore is certainly swimming in the global lake.
Meanwhile, India is ploughing through its longtime vested interest fault-lines, leaving protesting ancien regime protagonists scrabbling in the dirt. There is a long list—demonetisation, GST, the Benami Law, RERA, the Bankruptcy Code, the amended Company Law, recognition of NPAs, Aadhar, direct crediting of subsidies into newly opened bank accounts, increasing digitisation, other cash usage restrictions, administrative reforms, a drive towards accountability in the bureaucracy. All this has disrupted the use of black money, the cash economy, corruption, tax evasion, and a sense of entitlement. But despite these courageous and politically risky moves on the part of the Modi government, more than 450 million people in the growing Indian middle class seem agreeable to take the pain of a shift from the old nod and wink systems, in favour of the new. It is they who are investing in the stock market, not only from the metro cities, but from the hinterland of tier 1 to 4 cities and towns. These now house nearly 50% of India’s aspirational population, and mutual funds have seen a 46% uptick in investment from non-metro areas. Strangely, given the considerable amplification of negative views from the Opposition and its friends, the public is not buying the gloom and doom line.
Besides, 2018 has begun with a busy month of January for foreign affairs where the Modi government has shown tremendous progress. Israel’s Benjamin Netanyahu was here on a six-day feel good state visit with a massive business delegation in tow, returning Modi’s celebrated 25th anniversary of diplomatic relations visit to Israel last year. The Prime Minister is travelling to Davos to deliver the keynote address at the plenary session of the World Economic Forum (WEF). He is returning to host 10 heads of government from the ASEAN countries at India’s Republic Day celebrations on 26 January. In Davos, Modi will probably interact one-on-one with President Trump, the first US head of government to visit the Swiss summit in 18 years, even as Modi is the first Indian Prime Minister to go there in 20. This possible meeting is interesting to the Indian observer, because Trump began the New Year by suspending military aid to Pakistan. And both Pakistan and China say it is at the urging of India. This, though it is simplistic, makes for an excellent advertisement for Modi’s effectiveness. At the same time, both hostile countries have realised that they cannot, despite their combined advantages, provocations, and constant menace, get the better of India militarily.
While India’s own Central Statistics Office (CSO) has projected 6.5% GDP growth in fiscal 2017, the World Bank is expecting 7.3% for fiscal 2018, and 7.5% for two consecutive years thereafter. China is expected to grow at no more than 6.8%. Another laurel wreath is in the anticipation of India becoming the fifth largest global economy in absolute terms, just overtaking France and Britain, in 2018, and on its way to becoming the third. At the micro level, the stock market is expecting better quarterly results from many of the listed companies, and an uptick in private sector investment has resumed. Credit off-take has risen 10%. The 2018 pre-general election budget is expected to address the concerns of a slowdown in the rural and farming sectors, combined with encouragement for the urban classes and even the captains of business and industry. Yet it is slated to control the fiscal deficit after all. The government always has monies unspent to tide it over the budgeting exercise.
There are however several crucial Assembly elections scheduled in 2018 that will act as weathervanes for the general election of 2019. The Rajya Sabha (RS) will finally afford a majority to the BJP/NDA around August 2018, enabling the government to pass a number of reformist bills with little effective opposition.
Interestingly, there are pronounced shifts in the political narrative too. After years of being accused of being majoritarian and communal, even as the BJP under Modi has been emphasising “Vikas”, the shoe is on the other foot. We are witnessing the Opposition, led by the Congress Party, West Bengal’s TMC, and even the almost irrelevant CPM, wooing the Hindu vote, and stirring up old caste conflicts. Congress under its new president Rahul Gandhi is being particularly revanchist. It is casting its secular fate to the wind. It refused to support the gender equality of the triple talaq bill in Parliament, even though it will be pushed through by the government perhaps in the budget session itself. Simultaneously, it is supporting hastily recruited casteist outliers, fringe Hindutva protagonists, Communists, and even disgruntled elements in the higher judiciary. It is giving crass vent to its frustration via fear-mongering and rank abuse, even from pulpits abroad. The Muslims and even the Christians are feeling abandoned in the process. But none of it is giving it any electoral victories to speak of. The Opposition’s old-style Muslim vote bank politics is unable to subdue the rise of the BJP any longer. Not only is the BJP popular vote share consistently going up to even more than 50%, it is cutting across the board. This, from the panchayat level to Parliament.
The government has just cancelled the Haj subsidy but the saved money will be used to provide services to minority women and children. The Muslim vote bank, it appears, may soon be cracked wide open by the BJP, and this possibility has not been lost on the likes of Congress and the TMC. A few Shia imams, maulanas, and other Muslim thought leaders are also edging towards the saffron party. And a solid boost to Hindu sentiment can be expected if the Supreme Court allows a Ram Mandir to be built in Ayodhya. A shift towards the BJP may be taking place, despite Church opposition, in parts of the Christian majority Northeast, and in a more diffused manner, elsewhere in the country.
All in all, the melt-up is not being restricted to the stock market.