Farm loan waiver is currently the hot topic and it would gain more currency with the general election around the corner. From politicians to economists to rating agencies, everyone is talking about it. On the first day of assuming office, Madhya Pradesh Chief Minister Kamal Nath announced farm loan waiver. Similar announcement was made by Chhattisgarh CM too.
The stock market seems to be loving it. In the last one week since the election results were announced, the market has moved up by more than 1,000 points. What makes this rally special is that it is quite broad-based. Each and every sector and even mid-caps and small-caps have participated in the current rally. If we take weekly returns, none of the Sensex-based companies is in the red. The advance-decline ratio is hugely in favour of advances.
So how does one explain this rally? Post-poll surveys showed that the BJP will not do well. That information did not go down well with the market and the market tanked 700 points on Monday, 10th December. The RBI governor Urjit Patel’s resignation gave one more blow to the market to cope with. But the market proved the pundits wrong. Shankar Sharma, the renowned investor, recently tweeted – “India’s amazing post-election results rally has now re-ignited hopes of a bull market. What a remarkable turnaround from the gloom till the preceding week! Just waiting for small-cap confirmation now. If the Feb 2014 rally was termed ‘Modi rally’, what should this be called?
Should we call it “Farm loan waiver rally”? It would be rather premature to say at the moment whether or not we are entering a new bull market. But one thing is confirmed that the stock market does not have preference for any political party. Whether it is the BJP or the Congress, the market will move as per the fundamentals of India Inc. Investors must keep this fact in mind as general election is just four months down the road.
But what worries me is that there is no change on the fundamental side in the last one week that warrants this rally. On the contrary, something that market should be worried about is the farm loan waiver – which is again becoming the buzzword to gain rural vote bank. The Congress announced farm loan waiver during Karnataka assembly election and managed to keep the BJP at bay from forming the government, despite the anti-incumbency factor. It announced such waivers in Rajasthan, MP and Chhattisgarh and successfully managed to form the governments in these states. Looking at the success of Congress, many more political parties, including the BJP, will be lured to announce farm loan waivers as part of their election manifestoes to grab their chunk of the rural vote bank. This competition among the political parties will make the economy weak. There are no free lunches. To meet the funds for farm loan waivers, each state government will have to either increase revenue by imposing additional taxes or sacrifice on the capital expenditure to contain deficits. During the election year, increasing tax rates does not pay political dividend. So, expect capital expenditure to be the casualty. This will have huge implications on the growth of the state and, in turn, the country. India’s fiscal position is anyway not in great shape due to the less than expected GST collections and the rising subsidy bill. It is likely that we will slip on deficit numbers or manage by postponing some subsidy amount to the next year. Even ratings upgrade now looks remote. The global environment is not conducive either. IMF has recently indicated that it is likely to cut the world GDP forecast further. In October, IMF reduced world GDP forecast for 2019 from 3.9 per cent to 3.7 per cent. In such a globally challenging environment, farm loan waivers will put additional pressure on the Indian economy. With likely El Nino in 2019 there would be more pressure on the Agri outputs. This year Rabi crop sowing is down by 8 per cent YOY and Kharif production is no better than last year.
Political parties, despite knowing fully well that farm loan waivers are not long-term solutions, time and again resort to the same populist gimmicks to seek narrow partisan ends, keeping aside the country’s interest. Why can’t the Election Commission ban these kinds of announcements? Is it not a bribe to the voters? Why can’t elections be fought and won on the development agenda? How long do we need to live with the “developing economy” tag?
If any political party wants to announce farm loan waivers, let it do so, but the same should be met through the party funds and not from the government’s tax revenues. One does not pay taxes for farm loan waivers.
The stock market will soon realise that farm loan waivers can’t take the country into the league of the developed nations. This rally may not sustain as there are no positive triggers that are lifting the market. Even FPIs, post the election results, are net sellers in the Indian market. Indian mutual funds did not invest heavily either. There have been net outflows from institutional investors. The market needs quality earnings and liquidity to sustain the rally. I don’t see major improvement on either front in the short term. So, don’t get fooled by this rally. This is nothing but “trap again investor” rally.
PS: Investors can recollect that I wrote a column on 7th December – “A Mountain Dew Moment for investors – Darr Ke Aage Jeet?” suggesting not to panic when market was declining every day. I continue to believe that Indian stock market will do well but next couple of months would be challenging. Not so good quality companies are also moving up in this rally makes me worry.
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