The stock markets still seem to be in a heady mood, touching new highs every few days. However, in conversations about the markets, more and more investors and investment analysts are now circumspect about how far ahead of themselves stock prices have run. Corporate profits are mostly stuck where they were last year, and yet, most stock prices are 30-100% higher.
The idea is that up till now, stock prices have run on optimism about the new government, but from here on, returns in equity will come only when profits increase. That’s natural--as Warren Buffett has said, “In the short run, the stock markets are like a voting machine, but in the long run they are like a weighing machine.” That’s an unexceptionable idea, although one to which less attention is paid than should be.
The other idea that is floating around nowadays is that the government has done anything much so far and unless it starts acting soon, the optimism will fizzle out. This view is hard to support. Any given person has a list of reforms which he or she considers to be urgently and immediately needed. This is natural, as almost everything that could have gone wrong with governance in India has gone wrong. However, a minimum, immediate list of economic reforms would probably consist of hard infrastructure like power and transport; the fiscal deficit (by implication, inflation and interest rates), GST, and the cleaning up of tax administration.
With strong moves on coal, power projects, railways, WTO, diesel deregulation, GST and some more, I can hardly see any room for complaint. Simply the presence of a government that is interested in solving problems is a huge step forward, witness the decision not to appeal the court decisions striking down some ridiculous tax demands on corporates.
Of course, we’re entitled to expect that economic reforms will accelerate and something major will be done in the budget. However, for now, the graduated series of steps that the government has taken are a more than adequate demonstration of both intent and ability. As far as the markets go, the way forward won’t be smooth as investors are an impatient lot, but there can’t be much doubt about the direction.
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