Modi euphoria on Sensex? Voters are selling, foreigners buying

Has Modi fired up the stock markets? The Sensex has leaped up from 18,000 last August to almost 22,000. Many analysts say another bull run has begun. The markets think Modi is almost certain to come to power in May, reviving economic growth and business confidence.

However, the current bull run is most peculiar. The buyers are overwhelmingly foreign institutional investors. The sellers are overwhelmingly Indian individuals and institutions. Mutual Funds complain that, month after month, Indian investors are pulling out of the stock market, notwithstanding Modi’s rising prospects.

So, those who can vote are quitting the market, while those who cannot vote — the foreign institutional investors — are getting in. This is not exactly voter euphoria.

During the bull runs of old, a flood of companies would come out with IPOs (initial public offerings) that would be oversubscribed a dozen times. There would also be a long queue of “aam investors” for the quota of shares for small investors in the disinvestments of public sector undertakings (PSUs). Yet only a handful of IPOs materialized last year, while the government’s disinvestments plans crashed.

The 2013-14 budget envisaged disinvestment sales of Rs 40,000 crore in PSUs. Actual disinvestment has been less than half that, despite the use of financial tricks that cloak rather than reduce the true fiscal deficit. Last year, the ONGC had planned a big disinvestment, but found very few buyers, so the government-owned LIC had to come to the rescue and buy unsold shares. To avoid repeating that fiasco, the government this year mostly avoided disinvestments through public issues. Instead, it opted for several in-house sales within the pubic sector: these could be guaranteed, though their claim to generate “revenue” was suspect.

Instead of a public disinvestment, the Indian Oil Corporation last week sold Rs 5,340 crore worth of shares to two other government oil companies, ONGC and OIL. Puzzled readers might wonder what is gained by financial swaps within the public sector. Answer: such statistical fudging moves money from the reserves of the ONGC and OIL into the government’s coffers. The finance minister calls this “non-tax revenue” and claims it has reduced his fiscal deficit. In fact, it is financial smoke and mirrors.

A public issue of Coal India was proposed but abandoned since buyer interest was not certain. Instead Coal India was asked to declare a massive special dividend of over Rs 18,000 crore, just one more way of milking the reserves of a PSU and calling it revenue.

Not long ago, BHEL, the government turbine manufacturer, also planned a public disinvestment issue. But the government ultimately funked this, having little faith in Indian buyers, and instead decreed that the whole issue would be bought by the LIC. Disinvestment of other public sector giants like Rashtriya Ispat Nigam and Hindustan Copper was given up.

Although Indian buyers have been scarce, foreign buyers have been plentiful. Why then did the government not bank on foreigners for buying PSU disinvestments? Because foreigners had scurried out of India in the summer of 2013 and the government feared they might scurry out again. Only in the last month or so has it become crystal clear that foreigners are flooding in, not leaving. The reason for this will dismay Chidambaram: foreigners are flooding in because they now feel certain that a BJP finance minister will soon replace him.

Are foreigners euphoric about Modi? Actually, they are much less than euphoric. They have brought a billion dollars into India since the start of 2014. This has sufficed to send our markets soaring , but is a drop in the global financial ocean of trillions of dollars. Yes, foreign investors see Modi as a definite improvement, yet so far have placed only modest bets by their own standards. Their interest in India is better explained by the lack of decent returns elsewhere than by Modi alone.

Most foreign investment banks predict GDP growth of no more than 5.5 per cent to 6 per cent in the coming year, even though they expect Modi to be in charge. They are more hopeful about the medium term. Expectations about Modi have not yet created a true bull market. That will happen only when Indian investors plunge in. The likelihood of a Modi government has not yet persuaded them to do so, and some see the risk that Modi may not win.

So, the Indian investor is sending a message to the Indian voter: don’t get euphoric. A Modi government is likely, but not certain. His coming to power does not guarantee an economic boom, even though things should improve.