The last three months have seen markets rebound wordwide. India has also joined the party. The election results have further fuelled the rally and raised expectations of reform and change in India. It has reaffirmed faith in India’s democracy and political system.The rise in India has been accompanied by tremendous breadth and volumes. Going by technical factors, in the short term, we are most likely headed higher. I think the rally will also be driven by the rise in the risk appetite worldwide as is demonstrated by the weakness in the US dollar. In the medium term, what happens in the market will depend, in a large measure, upon the performance of the international markets and the extent to which the new Indian government meets expectations. In the long term, I’m of the firm opinion that the Indian bull market is very much alive and kicking. I think the triggers for the market going ahead can be broadly classified into domestic and international factors.
Domestically, the most important aspect is government policy, mainly the thrust on reforms. I will first discuss reforms which, to my mind, are most important for India and its economy and, by extension, our stock markets over the longer term. Top of my list is a comprehensive review of the subsidy regime in India. In my opinion, all subsidies should be relooked at with an open mind. One possible alternative could be to give cash compensation every month to a lady in each needy household.
This will put an end to the misuse of the subsidy regime and will allow for free pricing and competition in many sectors. Agriculture, too, I feel, requires special attention. We have to work towards a second green revolution as I feel there will be a surge in demand globally for agricultural products. Then, we need to frame policies which facilitate investment and economic activity. We need to do away with the hurdles in land acquisition for vital projects by having an effective legislation. It should be ensured that environmental policies do not become unnecessary impediments to projects. We must speedily review some of our archaic laws like the Indian Telegraph Act, 1884. Then, technology can be used to cut through the bureaucratic red tape.
In the short to medium term, the triggers for the market would be a change in FDI laws in insurance and banking, PSU disinvestment, labour law reforms and introduction of GST by April 1, 2010 as planned. Markets are also hoping for a review in the guidelines for foreign investment in stock markets. We need to allow any foreign entity, including individuals, to invest in our stock markets with a simple declaration certified by a qualified banker’s “know your client” rules.
International events, too, would influence the market. India’s relationships with its unstable neighbours, the stability of the international financial system and the value of the dollar, the pace and the quantum of economic recovery worldwide, especially in the developed world, would all be reflected in the gyrations of the Sensex and the Nifty. In the end, let me point out that in the last 6-7 years, Indian stock market has outperformed the markets across the world. I feel this will continue over the long term as India will remain one of the fastest-growing economies in the world. Also, India has one of the highest saving rates in the world coupled with a very well organised and regulated stock market.
Very little of this savings today comes into the stock markets. With the development of telecommunications, spread of television and growth in literacy, more of these savings will find their way into the equity markets. I think most analysts are vastly underestimating the effect of this mountain of savings entering the stock market over a longer term horizon.