FRONT PAGE | Tuesday, May 19, 2009 | Email | Print | 
Sensex soars on stability hope
Timsy Jaipuria | New Delhi
Can Govt sustain bullish trend?
Creating history at the Dalal Street, markets for the first time ever struck the upper circuit limits. Reacting to the remarkable victory of the UPA, the BSE Sensex opened 10 per cent up by 1,300 points and NSE 15 per cent up by 500 points. Within a sharp 60-second trade, the first upper circuit halted trading for two hours till 11:55 am.
In their second opening, the Sensex surged 2,110.79 points, hitting beyond the 14,000-level and NSE hit its final upper circuit of 20 per cent closing at 4323.15, rising 636.40 points. After the election results, indices resurged generously. Market experts said such a response was spurred by hopes of a stable Government that would push reforms to lift the Indian economy.
But what comes as a broader concern is that will the Government be able to keep such market trends sustain in the economy? Will the forthcoming Budget highlight the best way forward for the Indian economy on a global platform?
Talking about the challenges and their way out, Yes Bank economist Shubhada Rao said, “In tandem with other global economies, India too has been stepping up fiscal and monetary efforts to trigger growth. While concerns on the Government’s large borrowing programme persist, these stimuli appear to be working through the system gradually, notwithstanding the economy in the near-term domestic concerns, which were earlier stemming from election uncertainty and limited fiscal headroom for additional measures.”
“Now the Government should focus on infrastructure and industrial output, we believe growth will find key support from resilient rural demand, and a return to active policy-making once the new Government is on board in June,” she added.
Expressing similar sentiments, economist Siddharth Shanker said, “Fundamentals of economies do not change in a few hours or a few days, or for that matter, even a few months. Structural changes take time to happen and economies move based on those structural changes. The market move on Monday may have happened due to various speculative factors but surely it is not representative of the true health of the economy.”
Shanker said, “I feel the money that is coming into the market by way of private deals of listed companies is driving the market, coupled with some buying by domestic institutions, though doubts still arise on the existence of such trends. If that is true, there would be zooming of commodity index, economy would be strong if consumer durables and non-durable numbers go up consecutively for three-four months. The economy would be strong if the Q1 GDP numbers point to an annualised growth of 6 per cent.”
Discussing the expectations from the Budget, he said, “People at the grassroots level are awaiting Budget that takes care of the tax rates, Government spending on infrastructure projects, stimulus packages, etc. But the challenge is how the Government tries to manage its fiscal deficit?
The Government may look at various options —like by way of disinvestment or monetisation of deficit — but it would lead to a very high inflation. The second could be higher taxes, but this may impact the disposable income and thus would impact the growth rate. In case the Government wants to increase the taxes, it may want to increase the taxation of the higher income group or maybe try to bring into the tax net certain operations of the companies that are done to avoid the taxation in India. The possibility of the Government cutting down on subsidies at this point is also low.”
Testing such steps for the Government, he added, “The challenge for the Government will be, what it does on agriculture and education fronts as these are structural reforms that will play a role in sustained recovery when we look at a 10-year timeframe.”
Discussing the ideal way for the Government, he said, “The Government should ensure high agricultural growth rate as that will contain food inflation as also ensure rural demand. Second, the Government must cut down on its wasteful expenditure, and third, the RBI must ask the banks to start doing what banks must do and that is to study each loan application in a proper way, assess its true risks and rewards and then disburse loans. The banks did not do their job two years back when loan was just a call away and even now they are not doing their job when even the eligible companies and individuals are being denied loans.”
The Government will need to put lot of stress on software exports rather than on exports of items made out of natural products like cotton. This will ensure a healthy growth in the long run.”
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