A rising tide – Govt should revive disinvestment

Source: The post is based on the article “A rising tide – Govt should revive disinvestment” published in Business Standard on 4^th July 2023.

Syllabus: GS 3 – Indian Economy – Capital Market

Relevance: About the rising stock market indices and its implications for India

News: In the past few days, the stock market indices have reached record highs with a broad movement across various sectors.

What are the reasons behind high stock market indices?

The surge in the stock market has been primarily driven by foreign portfolio investors (FPIs), who have purchased over Rs 1.14 trillion worth of equities in the 2023-24 period.

There has also been strong buying from retail investors, both directly as well as via mutual funds, and domestic institutions have also been net positive.

Most sectors have witnessed double-digit returns over the past year, including underperforming sectors like the Nifty IT index and oil & gas, which have seen gains of 5.3% and 3.5% respectively.

Sectors like fast-moving consumer goods (FMCG), banks, realty, and metals have all returned over 30 percent and the automobile index 29 percent. However, the biggest winner is the public sector bank index, which is up 67.9 percent.

Credit growth indicates that businesses and consumers are borrowing again. This is supported by the fact that FMCG revenues have grown in Q4 FY23, and so have two-wheeler sales. However, other concerns are still present.

What are the concerns present?

Despite the stock market indices reaching record highs, valuations remain moderate. For instance, the Nifty is currently trading at a price-to-earnings (PE) ratio, which is significantly lower than its early 2021 PE ratio of over 40.

Similarly, the mid-caps and small-caps are also trading at lower valuations than they had hit earlier. The implication is that the markets could sustain higher prices and valuations.

What can be the way ahead?

A revival in activity across the primary markets is very likely, due to the optimism across secondary markets.

This presents an opportune moment for the government to revive its disinvestment plans, which have been on hold for some time. 

If investors are willing to buy Indian stocks, the government should take advantage of the market conditions and push disinvestment. This additional revenue can be used to push capital expenditure.