New Delhi, Jan 29 (IANS) The Economic Survey 2017-18 tabled in Parliament on Monday called for a vigil against a likely stock market bubble and that "sustaining" the current high valuations require "future earnings" to meet high expectations.
According to Chief Economic Advisor Arvind Subramanian, past examples have shown that asset prices have a tendency to pull-back after they rise sharply.
"The higher the prices go, I think our vigilance should increase correspondingly," Subramanian said in a press briefing held here.
Further, the Economic Survey 2017-18 presented by the Finance Minister Arun Jaitley said that:"... Sustaining these valuations will require future growth in the economy and earnings in line with current expectations, and require the portfolio re-allocation to be semi-permanent."
"Otherwise, the possibility of a correction in them cannot be ruled out."
Over the past two fiscals, the Indian stock market has soared, outperforming many other major markets. Since end-December 2015, the S&P BSE Sensex has surged 46 per cent in rupee terms and 52 per cent in US dollar terms.
Apart from the expectations of higher earnings growth, the survey pointed out that investors have reallocated their portfolios toward shares.
"As pointed out in last year's Economic Survey, the government's campaign against illicit wealth over the past few years-exemplified by demonetisation-has in effect imposed a tax on certain activities, specifically the holding of cash, property, or gold," the survey said.
"Cash transactions have been regulated; reporting requirements for the acquisition of
gold and property have been stiffened. In addition, rupee returns to holding gold have plunged since mid-2016, turning negative since mid-2017. In addition, previously, stock prices had suffered because reporting requirements were higher on shares than purchases of other asset. But the attack on illicit wealth has helped to level the playing field."
On the hindsight, it revealed a reduction in equity risk premium (ERP) -- extra return required -- on shares compared with other assets.
"Does this imply that Indian P/E (price-earnings ratios) ratios have reached a higher 'new normal'? Perhaps. It's possible that the portfolio shift set in train by the campaign against illicit wealth will result in a sustained reduction in the ERP (equity risk premium)," the survey said.
"...Beyond ERPs, sustaining current stock valuations in India also requires future earnings performance to rise to meet still high expectations. And this outlook, in turn, depends on whether a significant economic rebound is this time well and truly around the corner."
As per the survey, the exponential rise in the stock markets has led to a convergence in the PE ratios of the Indian stock market with that of the US at "a lofty level of about 26".
