Are happy times back again for Indian economy? Those who believe in the Sensex being an indicator to the health of the economy, it looks to be on the path of recovery. The recent government decisions including the deferment of the implementation of controversial regulations on tax avoidance, GAAR, looks to have given a fillip to positive sentiments, which in turn may have got reflected in the stock market index holding in the vicinity of 20,000 mark on Wednesday, having breached it on Tuesday.
The indicators of GAAR being the catalyst for the Sensex breaching the 20,000 mark was given by none other than Planning Commission Deputy Chairman Montek Singh Ahluwalia who said that postponement of GAAR for two years will help improve the investment climate. Such statement coming from a government top honcho clearly indicates a change in the course midway through the financial year.
The deferment of GAAR also came as a breather to foreign investors. The announcement by Finance Minister P Chidambaram accepting almost all the major recommendations of the Shome Committee on the tax reforms too has created a positive environ for investments which is getting reflected in Sensex figures.
There is a general feeling that Prime Minister Manmohan Singh, Finance Minister P Chidambaram and Deputy Chairman Planning Commission Montek Singh Ahluwalia are on the same page on matters of finance and economy. This has resulted in a bevy of reforms introduced by the government in the past few months. The same was not true when the Finance Ministry was under Pranab Mukherjee, who insisted on a more stringent tax regime. Pushing the reforms agenda has become all the more easier with watchdog allies like Trinamool Congress out of the government.
However, those celebrating the spurt in Sensex figures need to be cautious as headline inflation may have fallen to its lowest in three years in December but retail inflation came in higher at 10.56% for the same month. Reserve Bank of India (RBI) has the task cut out for them when the announce the monetary policy on 29 January.
The long-term behaviour of the stock markets would be decided following the announcement of the monetary policy by RBI and presentation of Budget by Chidambaram in February. Finance Minister has the onerous task to maintain a balance between the reforms and the money needed to fund programmes like Direct Benefit Transfer (DBT) scheme.