Yet it is not necessarily a contradiction for the stockmarket and the economy to go in different directions. They measure different things: the present value of future profits in the first case, and current business conditions in the second. Perhaps the stockmarket has been early in understanding India’s resilience, just as it was quick to grasp the severity of the epidemic. Share prices fell by nearly 40% between mid-February and late March, as supply chains fell apart and activity came to a standstill. Now factories are open, airports are crowded, the roads jammed with traffic and the air clogged by pollution. A renewed appetite for global risk, especially after news of effective vaccines broke, has only helped. In recent months India has been the recipient of record portfolio flows from abroad.
Investors may also have become more optimistic on growth prospects. The crisis has allowed the government to push through rule changes, such as agricultural and labour reforms, which could introduce needed efficiency. Its “Make in India” campaign is tariff-heavy, but also offers incentives to lure in foreign producers. Recent policy moves, such as the adoption of a goods-and-services tax, may have also toughened the environment for small, less formal firms, and pushed profits towards larger, listed ones.
Companies’ profits rose in the third quarter, even though revenues fell. The cost-cutting could signal greater efficiency. But it could also be a story that ends unhappily for investors, if it explains low employment and why, in the recent GDP numbers, household spending remained depressed. Growth in power consumption and freight traffic has begun to slow, suggesting the recovery may be sputtering. That would seem to bode ill for both the economy and the stockmarket. For now, though, investors are unfazed. ■
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