The Hindu Business Line : A market to watch

Popularity among international investors is rising but the negligible local participation and near-absence of domestic long-term money are worrying.

With the BSE Sensex closing 2006 with a 47 per cent gain and remaining a global outperformer, market watchers who at the beginning of the year cited India's premium valuations to make a gloomy prognosis for its stocks have once again had to eat humble pie. The strength in foreign portfolio flows ($8 billion for the year) despite volatile global interest rates, the traction in Foreign Direct Investment flows, and the ramp-up in inbound private equity deals all point to the "India story" being a bestseller. But, then, market valuations have moved from the merely stiff to rich, taking for granted an 8 per cent economic growth and double-digit expansion in corporate earnings. For the next leap of faith on India, however, not only will Corporate India have to build on its impressive show, but the government must provide fresh policy triggers. Focus on agri-business, reforms to unshackle sectors that are laggards and greater domestic participation in the stock market are some of the key policy imperatives.

Agriculture has been the odd one out in the India growth story, even as manufacturing and services have taken on key roles. Declining capital investments and numerous distortions in trade and pricing of farm produce — often made worse by policy flip-flops — are the key problems. These demand clear policies on farm trade and pricing, besides steps to draw investments into irrigation, transport infrastructure and agriculture supply chain. This could set off a beneficial ripple effect on consumption and, thus, on corporate earnings. Second, though reforms have cut a wide swathe, a few sectors still remain hamstrung by archaic controls. In the absence of pricing power, domestic oil and gas companies have been mutely gawking at the re-rating of energy stocks worldwide. Uncertainty over possible ceilings on selling prices in the New Drug Policy has enervated pharmaceutical stocks. Limiting policy interventions in these sectors and restructuring the subsidy regime could draw more sectors to the India Inc party.

If the steadily rising stock values are a sign of the Indian market's rising popularity with international investors, the episodes of sharp volatility underline its increasing vulnerability to global gyrations. While global influences cannot be wished away in an era of free capital and trade flows, negligible local participation in equities and the near absence of domestic long-term money in the stock market are worrying. If the long-pending pension reforms are pushed through, they could open up a stable source of domestic liquidity. Persuading households to add stocks to their retirement portfolio may not be as difficult as before; rising mobilisation by equity funds and the popularity of unit linked insurance are signs that the stock market buoyancy of five years has done a good job of convincing retail investors of the benefits of equity investing.

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