sensex,Real Economy and the reality

Sensex, Real economy, and the reality

This refers to your edit 'The Sensex Rides again' (ET,dt 22nd Sep,2010). The sensex has again crossed 20 K mark after a gap of 32 months and the market men are happy. Even the Finance minister has expressed his happiness by saying that after 2008 January, for the first time it has crossed 20,000. No doubt, it signifies the improvement in the confidence level among investors both from domestic and international market over the fact that the economy is performing well and will continue to perform better in future also. But, how far, this confidence is sustainable and manageable is an issue well analysed in your edit.

The rise in index is basically on account of increased flow of funds from international markets seeking better return. The investment climate in both the US and European markets is not very conducive both in terms risk and return and the investors have found better avenues to divert funds to Indian market which is safe and offer higher rate of return. From Foreign institutional investors angle, it is fine, but to what extent our economy can absorb these funds without being hurt is what needs to be examined when the index goes up and up. The real economy is not that bright as on today with low productivity in agriculture, high unemployment, high inflation, inadequate infrastructure,high level of poverty etc etc to boast of a high sensex index which in any case cannot be a yard stick to measure the real strengh of a developing economy.

The inflows of short term funds seeking quick returns purely on a speculative basis although essential perhaps to provide liquidity and strength for capital formation and capital market, bring with them the problem of exchange rate and interest rate management which have a bearing on exports, imports, inflation, current account deficit etc.This has to be kept in mind while assessing the benefits of rise in sensex. Capital market is germane to a large segment of population is a fact in India and cannot be ignored . In fact an index indicating how much of the population is part of the capital market would be a better yard stick to assess the strength of the real economy.

Dr.T.V.Gopalakrishnan