Shankar Sharma, founder of First Global, explained the phenomenon in a recent interaction with Outlook Business. “The equity market is a collection of companies. Till the time the companies which are part of the Nifty perform well, the index will move up. The equity market is a function of companies, not the economy. Keep in mind that the IT sector is the second-biggest constituent of the index, with over 18 per cent weightage. Moreover, metals, pharma and automobiles derive a significant chunk of earnings abroad. Today a big chunk of Nifty earnings is coming from abroad and it is growing at a brisk pace. So, judging Indian equities using the prism of the domestic economy would give you a faulty picture.”
Who Bears The Brunt Of A Slowing Indian Economy, Then?
Smaller firms depend on domestic factors, points out Sharma. “Equity markets thrive and survive on earnings growth. So, the companies that are dependent on the domestic economy for earnings growth would bear the brunt of the sluggish Indian economy. This gets reflected in the underperformance of banks and financials in the past few years. But, with the normalisation of the provisioning cycle, banks too are participating in the current leg of the rally.”
Is There Any Positive To Look Upto?
According to a recent study conducted by state-owned SBI banks’ research department, the formalisation of the Indian economy has reached 80 per cent of the GDP as compared to just about 48 per cent in FY18.
“...there has been a positive development in the Indian economy amidst the pandemic. Owing to the various efforts of the government, there has been an increase in the formalisation of the economy. Based on specific examples, at least Rs 13 lakh crore has come under the formal economy through various channels over the last few years, including the recent scheme on the E-shram portal,” the SBI report said. India’s real GDP was estimated at Rs 135.13 lakh crore in 2020-21.