Indian markets are at an all-time high despite a volley of bad news. Covid-19 remains a colossal threat with barely a tenth of our adult population fully vaccinated. Which means a potential third wave may be inevitable, leading yet again to frequent lockdowns, low personal incomes and consumption, job losses, unemployment – i.e., a perfect storm in which demand has eviscerated and national income is yet to recover to levels reached two years back.
In other words, ordinary folk are suffering through an unprecedented economic vacuum. Inflation is high, fuelled by insane taxes on fuel, and record commodity and food prices. And now, inflation is filtering through to manufactured goods as well.
The government is borrowing insatiably, throwing bond yields out of kilter. The central bank is trying every hook, crook, and tactic to hold them down, but the logic of markets is relentless – interest rates will and must rise. The U.S. Federal Reserve has already indicated it’s ready to raise interest rates earlier than expected, i.e., it could stop creating reckless money in what will be called Taper Tantrum 2.0.
All of this – high inflation, low demand, shrinking national income, high interest rates, a tapering Fed – should be terrible news for Indian stocks, right? Yes, and yet they are at all-time highs. Why?
Demonetisation, GST, And Digital Revolution – Powering India’s Formal Economy
While there are and always will be several complex intersections to explain sky-high stock markets, I would zero in on a few critical and core factors. You’ve heard it trotted out before as the principal reason, and it’s true – a tidal wave of cheap money has been created in the West, especially in America, which has inflated asset prices all across the world. Indian stock markets too have been buoyed by this unrelenting inflow of dollars, shoving forex reserves to well above $600 billion.
But India is also host to a unique and accelerating phenomenon that has played out invisibly but “violently” over the last five years, beginning with Demonetisation in 2016, exacerbated by the launch of Goods and Services Tax in 2017, finally becoming an inevitable outcome via the Covid-instigated Digital Revolution of 2020. These three forces have resulted in a massive “formalisation” of India’s economy as organised corporates virtually swallowed the share of small, unorganised, informal sectors.