India Intelligence Report

SENSEX Breaks 12K-Barrier 


Defying international trends relating to oil and security concerns, strong domestic fundamentals inspired Indian mutual funds to flood the stock markets raising the SENSEX index beyond 12,000 in just 16 sessions. Economic fundamentals have never been this solid in India to justify such growth.

A string of solid corporate profit earnings reports, higher consumer confidence, large disposable incomes, and growing foreign direct investment by multinationals in their Indian subsidiaries and new ventures point to several years of sustained growth. Macro-economic fundamentals also look very good prompting the Government to affirm that there is no bubble in this meteoric rise.

From being 29% of the Gross Domestic Product (GDP) in 2001-2002, Indian market capitalization m-cap) has grown to be 99% in 2006-2007 way ahead of all Asian peers such as China, Indonesia, New Zealand, Sri Lanka, Taiwan, etc. Economists believe that mature stock markets have higher m-cap to GDP ratios. Although the Indian stock market is 131 years old, decades of Nehruvian Socialism, centralized Soviet-style management, licensing regime, and restrictive market practices had bottled the Indian economy into unnaturally lower levels of development. It also kept development and prosperity away from most Indians. With the economic liberalization started in 1990s, successive Governments endured the politically hazardous task of dismantling an over-weighted and inefficient mechanism rooted in red tape and populist opulence.


These changes have not gone unnoticed. The Standards & Poor (S&P) Ratings Services have raised their outlook on India from “stable” to “positive.” While their rating of the Indian sovereign has only been marginally improved but still at junk-bond levels, the upward revision of macro-economic and some corporate ratings will enable companies to gain access to investments at lower rates to fuel their growth. Justifying its rating, S&P said “the outlook revision reflects improved prospects of a stabilizing debt burden based on greater effort across all levels of Governments to consolidate their fiscal reform.” Applauding efforts by both Federal and State Governments to reign in fiscal deficit, S&P projected fiscal deficit to fall from 10% in 2002 to 8% this year. It said that the Government’s stronger tax measures such as Value-Added Tax (VAT), Service Tax, and tighter tax administration will bolster revenue streams so “India’s economic prospects are stable and strong” projecting “incremental structural reform” that will “raise GDP trend growth over 7%.” 

S&P concluded, “further liberalization of the economy and infrastructure improvements will help India’s trend growth.” They also said that India could achieve investment grade with these reforms “coupled with continued fiscal consolidation.” It also warned “if the fiscal consolidation stalls or the reforms agenda derails, the outlook could be revised to stable.” It wanted India to bring down its contingent debt from 9% of the GDP to lower levels, improve efficiency of public sector utilities, reduce banking chaos such as the one triggered by the largest commercial bank State Bank of India strike, improve reliability of power supply, and continue with administrative and labor reforms. 

India will do well to heed this warning carefully. While it cannot control external threats to its growth such as rising oil prices, terrorist attacks, showdown with Iran, etc. it can easily manage internal chaos usually created by politicians during elections. Some of the these populist announcements on reserving jobs for specific castes, placating to political allies [Cong Pussyfoots around Commies], and wrong political decisions such as artificially low oil prices, exporting iron ore, and compromising national health.