For Sensex to double, it needs to fall big

What would it take for the Sensex to double from here?
Very strong foreign flows driven by a sustained weakness in world currencies, especially the dollar.

Not possible, because a sustained weakness in the dollar will throw the world into a turmoil because the greenback will lose its reserve-currency status.

And China and Japan will face huge reserves depreciation given their large dollar holdings, causing widespread havoc in the financial markets.

A very strong domestic economy growing at a sustained pace of over 9% over the next few years looks unlikely given the disturbances in the form of high inflation, fiscal deficit and poor governance at the Centre.

A very strong dose of forced reforms? Yes, that’s the right answer.
The excesses of the just-concluded decade are visible in the macroeconomic parameters of the country.

Inflation, which was looking be under control is now persistently high. The first-half of the decade saw inflation in the low single digits, while the second half saw inflation in the high single digits to low double digits.

The sustained rise in inflation expectations is largely attributed to supply-side constraints, but the fact is that demand outstripped supply due to government excesses.  

The government is spending huge amounts of money on social schemes such as those for rural employment.

The Centre has also waived off loans of Rs60,000 crores to farmers. It is subsidising fuel, fertiliser and food. It has increased staff pay without looking at commensurate increase in productivity.

All this has caused persistently high inflation and it doesn’t look to ease given that the government is still following the very same policies that lead to the current high inflation.

The country’s finances have worsened with fiscal deficit standing at 5.5% of GDP. The deficit had come down to 3% of GDP in the middle of the last decade.

Taking off-balance sheet items such as oil and fertiliser bonds, the government stock of debt has gone up by almost two and half times over the last five to six years.

Tax reforms have not happened, tax rates are down and the tax-to-GDP ratio is still at low double-digit levels. The government continues to worsen its finances by lack of expenditure reforms.

The corporate sector in India, which was performing well in all parameters in the first half of the decade, is seeing signs of stress.

Revenue growth is in low double digits from high double digits, margins have consistently come down and debt levels have increased due to capacity build-ups both organically and inorganically.

The banking system, which came out of the credit crisis well with strong balance sheets, is now coming under more scrutiny, especially on loans given to real estate and infrastructure companies.

Many government sector banks have been forced to recapitalise to meet statutory norms. The involvement of the government in the economy has gone up manifold and the government is actually running what was an independent central bank.

There is a definitive, urgent need for reforms. The reforms of the 1990s, when the economy was in deep turmoil with high inflation, high bad loans at banks and low forex reserves brought about a sustained dose of reforms.

The financial sector was opened up to private and foreign participation, expenditure and cost controls were put in place, banking laws were eased on loan defaults, labour rules relaxed and the Reserve Bank of India was allowed to act independently.

This helped the stressed markets to jump up manifold when the reforms bore fruit.

The 2000-10 decade has seen no reforms whatsoever. The economy has almost gone back to the ills of the 1990s — it has to be brought back and placed on a stronger footing, for its next big move.

Unfortunately, that will happen only when there is deep turmoil, which seems just round the corner. That will take the markets down, but that will be a cue for reforms and then the next big move will happen. This government is too shortsighted to bring in reforms voluntarily.