For a Sustainable Sensex

OH, WHAT A giddy ride it’s been, up, up and further up the Sensex curve, as many a stockmarket player has had occasion to exclaim. On January 17th, the BSE index of 30 blue-chip shares whizzed past the 35,000 mark. Corporate earnings have not quite kept pace, but the Sensex is more than 30 per cent higher than what it was at the start of last year. Might this turn out to be the peak of the irrepressible exuberance that dominated 2017?

It’s easy to picture this rally as being apiece with the one that began in 2014, except that it isn’t; that buying spree peaked in early 2015, with the index sliding for about a year thereafter. In the latest spell, Indian shares started soaring soon after a Demonetisation dip and haven’t looked back since. By that point, domestic funds had seized control of the market’s direction from Foreign Institutional Investors (FIIs), a transition that can be traced to the latter half of 2015. If 2014’s gains had mostly been FII-led, with vast sums being invested by them on expectations of an economic revival, the past three years have been a story of FIIs offloading shares unto Indian institutional buyers. While the former were net sellers of equities worth an estimated Rs 42,800 crore last year, the latter are said to have pumped almost Rs 90,000 crore into the same, much of it the savings of common folk with investment plans and retirement funds. That any of this money should be at threat was bound to get fingernails chewed, and so it has.

Among the voices of concern to emerge is that of Kotak Mahindra Bank chief Uday Kotak, who has expressed unease over “the risk of a bubble” blown by too much money chasing too few shares in India. “Money is coming into a broad funnel and it’s going into a narrow pipe… [a] massive amount of Indian savers’ money is now going into a few hundred stocks,” as he has been quoted as saying. “The speed at which stock prices are going up is sheer money power.”

By the usual measure of evaluation, Sensex shares are overpriced as a combine. The Price-Earnings ratio of the index (by reported profit data), a figure that denotes how many rupees one must pay for each rupee of equity earnings, is nudging 23.7 now. Although there is no saying what’s reasonable, anything over 19 is typically taken to be bubblesome. The PE ratio usually stays in the teens; it was above 20 on the eve of the last two big market crashes of 2001 and 2008, though both these were occasioned by global shocks (worsened by local factors). In the more recent instance, it was the West’s Great Recession that kicked in, throwing into turmoil a market that was watching foreign money flee in response to the Government dropping its fiscal commitment in favour of a pre-poll farm bonanza.

Quite a few observers today seem to be readying themselves for déjà vu on the fiscal front. The extent to which this could disrupt the ongoing stock market rally, however, is an open question. The global horizon looks clear, most FII inflows that had to bid India goodbye have already done so, presumably, and lay investors can take heart in the assumption that the bulk of what is pushing up prices is not ‘hot money’, the kind that turns tail at the first hint of trouble. At a pinch, this last bit could also justify the extraordinary PE ratio of the Sensex. Seen another way, it signifies how many years it would take for these companies to earn the sums put into their shares. As the payback patience of investors increases, so should the prices they’re willing to bear. It’s not a casino gamble, after all, but a medium for people at large to share the prosperity of India Inc over the long-term—as also the surest refutation of the charge that profit is the exclusive privilege of a small business elite.

Whether or not the Sensex is in for a ‘correction’, the trend of widening equity participation offers investors reassurance. What could play spoiler, though, is if they are asked to cough up taxes on dividends; this would be unfair to shareholders, since their firms’ earnings are already taxed. Another dampener might be a tax imposed on ‘long-term capital gains’ made on stock sales, which would hurt their incentive to stay invested for extended periods.

Yet, India’s fiscal math is likely to be a far bigger determinant of how much higher the Sensex goes in the years ahead. A lapse for one fiscal year might cause only a shudder or two, but runaway profligacy would risk the sort of inflation that last brought the country’s economy to grief.

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