EXECUTIVE SUMMARY. The stock market has responded euphorically to India’s central government budget for the fiscal year 2021-22 (April-March). The question is: does this indicate that investors anticipate a revival of investment, employment, and GDP growth? Paradoxically, it may not. While investment in the macroeconomic sense may not increase, and GDP may take some time to come back to its pre-Covid levels, it appears that the market is unconcerned. The reason is that it anticipates a rise in corporate profits as a result of the measures in the budget, and it is excited about the government’s tough stance regarding reforms.
During a severe economic slowdown, such as what India is currently facing, large scale privatisation of the public sector is unlikely to stimulate growth. The private sector typically is focused on short-term profits, and in an environment where aggregate demand is constricted and capacity utilisation is low, the private sector cannot be expected to undertake capital expenditure. It is only the government and government-owned companies which can play a counter-cyclical role in the economy in a downturn. The privatisation of the public sector would likely result in cost cutting to generate higher profits, instead of stimulating the economy.
The Indian prime minister’s statement in parliament that “improper words against the private sector…[and] the culture of abusing the private sector” may not be tolerated indicates that the government now aims to bring about a major change in the political culture of India. Indeed, just as various dissidents, protesters and even comedians have been charged with serious offences against the state, it is possible that those alleging private corporate firms with corruption may face similar charges. This is intended to carry through unpopular reform measures with a minimum of opposition.
Given the vulnerable state of some government banks, the proposed privatisation of two government banks may not yield much revenue. In such a scenario the purpose of privatisation may be to send a signal to international investors and the capital market of the government’s tough reform credentials, rather to raise substantial budgetary resources.
The central role now given to the private sector as “wealth creators” at the vanguard of the economy may not result in the stated outcome of higher investments, employment and growth. But it may boost corporate profits, especially at the top of the corporate sector, even if the rest of the economy may actually decline. It is this boost to corporate profits that appears to have enthused the share market.
I, Hemindra Hazari, am a Securities and Exchange Board of India (SEBI) registered independent research analyst (Regd. No. INH000000594). I have no exposure to companies mentioned in this report. Views expressed in this Insight accurately reflect my personal opinion about the referenced securities and issuers and/or other subject matter as appropriate. This Insight does not contain and is not based on any non-public, material information. To the best of my knowledge, the views expressed in this Insight comply with Indian law as well as applicable law in the country from which it is posted. I have not been commissioned to write this Insight or hold any specific opinion on the securities referenced therein. This Insight is for informational purposes only and is not intended to provide financial, investment or other professional advice. It should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security.