The market is optimistic, must know something we don't.

Regardless of all the negative factors in the economy the Indian stock market is booming, writes Manas Chakravarty. Economic growth is going to be weaker than before, prices of commodities, including oil, are rising, banks are struggling with huge bad loans, credit growth is weak, banks don't have capital to lend and so need a large amount of money for recapitalization, investment demand is down, the US could become more protectionist, the informal sector, which employs over 90% of workers, has been hit hard by demonetisation, and the Goods and Services Tax will create a lot of uncertainties in the economy, especially in the unorganized sector. But the markets remain buoyant because of its faith in Prime Minister Modi, that even the prospect of a rise in interest rate cannot dampen. Between 1 April 2014, when Modi was elected, and 10 February 2017 the MSCI index for India has risen 10.3% in dollar terms, whereas China has risen 6.9%, Philippines by 0.2%, Thailand by 1.2%, while Indonesia has fallen by 8%. Only the US has grown faster. The premium for the future one year price-earnings multiple for MSCI is 19.56% for India, compared to 13% for MSCI Asia ex-Japan. So how great is our economy? Even before the banning of Rs 1,000 and Rs 500 notes, Gross Fixed Capital Formation was negative for 3 quarters, industrial activity was negative in 8 out of 14 months and private investment is down. Exports have risen for 5 consecutive months. Total exports from April-January was $221 billion, total for the financial year is expected to be $270 billion, while imports were $307.3 billion. China exported a total of $2.15 trillion in 2015. Demonetisation was imposed for 2 reasons, one to catch people who were not paying income taxes, and so were hiding vast amounts in high currency notes, and two, to get rid of counterfeit currency, printed by Pakistan to destabilise our economy. The government replaced the old notes with new notes of Rs 2,000, which were said to be difficult to copy. Now fake Rs 2,000 notes have been found which are much better than before so that they are almost impossible to distinguish from the real ones. The direct tax department has refunded a total of Rs 1.42 trillion for the last financial year. They issued refunds to 16.2 million people, 92% of which were below Rs 50,000 each. In 2012-13 only 12.5 million people declared taxable income, so even if that figure has increased the vast majority of Indians do not earn enough to pay tax. It means that the government collects excess tax in advance and then pays huge salaries to an army of officers to refund the excess. It is good that the stock market is optimistic.