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Stock market exuberance

The stock markets posted phenomenal gains on Monday, with the Sensex moving up by nearly 2,100 points and the Nifty by more than 650 points. These reflect a welcome change in business sentiment that has turned positive after the election results. After all, market participants everywhere welcome stability, both economic and political, and the Congress party’s surprisingly impressive performance suggests that those two can be achieved in India. Yet, the unbridled enth usiasm shown by the market participants is not quite supported by any change in the fundamentals. It may well be that the inflow of foreign funds may keep the markets buoyant for a while. It is facile to assume that even a government with a popular mandate can embark on sweeping “market friendly” policies immediately. The United Progressive Alliance had reaped dividends by emphasising their social welfare and the pro-poor programmes in their election campaigns and it is highly unlikely that these will be downplayed.

In any case, economic reform in its broadest sense needs to be redefined and better understood in the current Indian context. For instance, any revival of the public sector divestment programme will depend on how well its limitations are understood. The UPA government will find it difficult to move away from the gradualist approach of the past to the potentially contentious areas of reform, including labour laws and capital account convertibility. The government’s urgent task would be to arrest the slow down and restore financial rectitude, at least over the medium-term. Alongside creating an environment for high growth, governance issues including those that emphasise efficiency in the delivery of public services will necessarily occupy the centre stage. Sooner rather than later, the markets may become mindful of such realities.

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