New Delhi, Jan 29 (PTI) Growth in the economy as well as Also Read - 'Another Phase of Greatest Witch Hunt', Says Donald Trump After US Senate Acquits Him in Historic Impeachment Trial
corporate earnings is required to sustain the current stock Also Read - US Court Seeks Status Report On Visas To Family Members Of H1-B Holders
market valuations, otherwise the possibility of a correction Also Read - The Weeknd Performs Live At Super Bowl Halftime Show, Fans Share His Then-And-Now Photos
cannot be ruled out, the Economic Survey said today.
The higher valuation in the stock markets could be due to
fall in the equity risk premium (ERP) reflected in a massive
portfolio re-allocation by savers towards equity in the wake
of policy-induced reductions in the return on other assets.
ERP, in market parlance, refers to the extra return
required on shares compared with other assets.
“But 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,” the Economic Survey 2017-18 noted.
Over the past two fiscals, the Indian stock market has
soared, outperforming many other major markets. Since end-
December 2015, the S&P index has surged 45 per cent, while the
Sensex has climbed 46 per cent in rupee terms and 52 percent
in dollar terms, leading to a convergence in the price-
earnings ratios of the Indian stock market to that of the US.
Explaining this convergence, the Survey said expectations
of earnings growth, which lie at the origin of the stock
market boom, and demonetisation have given impetus to the
According to the Survey, the price of an asset is not
solely determined by the expected return on that asset. It is
also determined by the returns available on other assets.
“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.
“Cash transactions have been regulated; reporting
requirements for the acquisition of gold and property have
“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
assets. But the attack on illicit wealth has helped to level
the playing field,” the Survey noted.
It said that all these factors have caused investors to
re-evaluate the attractiveness of stocks. Accordingly, they
reallocated their portfolios toward shares, with inflows
through stock mutual funds, in particular. This has helped in
decline of the ERP.
This is published unedited from the PTI feed.