Stock market turbulence

The rise and fall of market indices is not often linked with the ground reality. The Sensex plunged to a 10-month low on the last trading day last week. The same 30-share index was at its lifetime high just over a month back. The market, which brooked no challenge till last month, sank in despair on Friday after investors registered a notional loss of Rs 2.71 lakh crores. Admittedly, gains and losses in the stock market are driven more by sentiments than realities. Markets surge as well as plunge without any substantial change in India's economic fundamentals. 

The Sensex was at its peak despite the economy facing fundamental issues such as growing unemployment, farmers' suicide, industrial slackness and tardy growth. Interestingly, it fell sharply days after the Modi government confessed that all was not well with the economy and that a booster dose was urgently needed to revive it. Instead of celebrating the government’s decision, the market turned gloomy and the Sensex lost 448 points in just one single session. In fact, those who invest in the stock market perhaps fear that the stimulus package would be an additional burden on the public finances and the government would be unable to contain fiscal deficit at the targeted 3.2 per cent of the GDP in 2017-18. In other words, the government will be forced to borrow more to compensate the slack private investments. The government has been left with no alternative because its misadventures such as demonetisation and hasty implementation of GST (Goods & Services Tax) have dried private investments.  

No government should allow itself to be deterred by stock market volatility. The fiscal deficit target is a desirable political goal but there is nothing very sacrosanct about it. If the government is convinced that a stimulus package is what the economy needs, then it need not be unduly bothered by stock market fluctuations. When the economy recovers its breath, investors would once again become enthusiastic about taking risks.