The Sensex has little to do with the common man

The good times are back. Or so it seems for the stock markets. The Sensex has climbed back to the 20,000 mark that it last saw in January, 2008. And the reason is that foreign institutional investors are once again putting their trust in the India growth story.

In the midst of all the bad news that seems to be dominating our front pages, whether it is the morass of the Commonwealth Games or the unending chaos in Kashmir, finally we hear some good news and it cheers us up.

The question is, how important is the rise and fall of the Sensex for the common man? Not very much, and this is what the Left parties have always been saying.

This point was made more stridently soon after the UPA-1 government came to power, when suddenly the markets crashed for little apparent reason.

There is no real evidence to substantiate the allegations, but it was widely rumoured that a major blue chip company was trying to make the world think that bringing the Left parties into the UPA coalition would be disastrous for the economy.

Well, the Sensex bounced back despite the Left’s presence and with no repercussions on the economy. One must thus recognise that the Sensex is merely one of the many indicators of the economy’s health and sometimes it becomes a skewed indicator as it reacts largely to factors affecting the well being of the corporate sector.

The rise of the Sensex, for instance, does not have any link to reports of farmers’ suicides or to agitations by farmers over land acquisition with little compensation. Nor does it have any relation to the numbers of people below the poverty line or whether foodgrains are rotting in godowns rather than being fed to the hungry and malnourished.

What the Sensex does react to is developments related to business. The spurt in recent months is due to the fact that business is booming in this country. With a huge domestic market, Indian companies are not as dependent as the rest of the world on external demand. The revival of domestic demand began about a year ago and accelerated gradually, bringing about a sharp rise in industrial output to around 11% in the current fiscal (2010-11). Despite agricultural output continuing to lag, the uptrend in the manufacturing sector is pushing overall economic growth back to a healthy 8.8%.

While the rise in the Sensex is all to the good and surely brings cheer to the corporate sector and millions of investors, it does not necessarily reflect a rise in the overall well being of the masses. 

It does not reflect the hardship being caused to both urban and rural poor as a result of runaway inflation. What is worse is that the rise in prices is steepest in the case of food products. Food inflation has been rising at a phenomenal rate of 15% while overall inflation is ruling at 8.5%. The Reserve Bank of India (RBI) has also recognised the need to curb the inflationary spiral and has raised interest rates about five times this year in a bid to reduce liquidity in the market.

Despite the ballooning of the Sensex, therefore, the economically backward segments of society are facing even greater hardship than ever before. With prices of even basic essentials like pulses and vegetables virtually out of their reach, it becomes difficult to raise a toast to the ascent of the markets.

One can only express some mild contentment as it will bring relief to middle class investors who may have pinned their hopes on the equity markets and faced rough times during the recession of 2008-09.