The 30-share BSE Sensitive Index, or Sensex, has crossed the 50,000-mark for the first time in history. The journey of the Sensex has been remarkable since 1979 when it was 100. It rose 30 times over the next 20 years and has further gained 17 times in value over the subsequent 20 years. Even if we assume that it grows 10 times from the present level in the next two decades, we are talking about a value of 5,00,000. It may grow more, not less.
Share prices move in line with profits of the index constituents. Most companies depend on India’s economic growth. There are clear challenges on that road, however. The first begins with the Union Budget in a few days. It is very clear that India’s economy is all set to witness a contraction for the first time in many decades. The actual numbers could vary and would be known only in the first half of 2021. The banking sector is riddled with non-performing loans. A lot of money is lying idle in the banking system when deserving borrowers should get it for business expansion. A lot of gains in the stock market are largely driven by the cheap money flowing in from foreign portfolio investors.
A new article in the latest bulletin from the Reserve Bank of India assesses the state of India’s economy. It argues that the recent shifts in the macroeconomic landscape have brightened the outlook, with GDP in striking distance of attaining positive territory and inflation easing closer to the target. It talks of a ‘V’-shaped recovery where the ‘V’ stands for vaccine. It is not the classical sharp bounce-back, but one dependent on the government’s effort to vaccinate the country.
The article singles out e-commerce and digital technologies as the bright spots for India’s recovery. That is in a world where pre-pandemic levels of output and employment are a long way off. “It will take years for the Indian economy to mend and heal, but innovative approaches can convert the pandemic into opportunities,” the article said. Developments in 2020 have ushered in a new digital transformation on the back of strengthening consumption demand and growing corporate sector business transactions.
Between April and December 2020, digital transactions under the Unified Payment Interface, or UPI, have nearly tripled in value. Similarly, all other forms of digital transactions like NEFT and RTGS have doubled in value too. “An urban reform agenda can be set up across seven thematic pillars: planning; housing; transport; environment; public health; gender; and vulnerable populations,” the RBI article quotes a suggestion from the World Economic Forum. It actually calls on the government to pay heed and make announcements to that effect in the budget. A lot of analysts’ reports published ahead of the budget are anticipating that the government will boost capital expenditure in high growth infrastructure sectors such as roads, railways, and housing.
What this means for you
The path towards a new record value in Sensex is full of challenges. If you are at a stage where you are planning retirement, your children’s education, or other long-term goals, it is a wonderful time to start. That is despite the dramatic surge in share prices in recent times. Interest rates are likely to remain low for a long time to come. As a result, the cheap money will continue to find ways into assets like equities, property, and gold. As far as Indian companies are concerned, the potential for growth continues to be better than businesses in rich countries. A young, high consumption-driven economy is likely to grow faster than most countries in the rich world.
If you are new to the world of investing, you may want to immediately engage a financial advisor. Equity investing is most likely to be volatile and not for the faint-hearted. You need to decide on your financial goals right away. Giving a direction to your savings is another good idea. Regular monthly investments through mutual funds is the best approach and, if that is still a bit complicated for you, index investing is a good first step.
(The writer is editor-in-chief at www.moneyminute.in)