Business

As Stock Markets Scale New Highs, Arvind Subramanian’s Advice is to Err on the Side of Caution

Subramanian said the markets are surging because of money being diverted from real estate and gold, and that vigilance should be increased to ensure that a sharp correction does not happen.

Subramanian also flagged the risk posed to the economic growth by rising oil prices, which could stoke inflation. Credit: Pixabay

New Delhi: Chief economic adviser Arvind Subramanian on Monday cautioned increasing vigilance as stock markets scale new highs that are not justified by the health of the real economy.

“The higher stock prices go up, the higher our vigilance should go up,” the CEA said, while making a presentation on the Economic Survey 2017-18, tabled in parliament on Monday.

He, however, downplayed concerns of a bubble and added that the factors driving the bull run in the Indian markets are different from those in other countries. Subramanian explained that the Indian stock markets are surging because money is being diverted from real estate and gold, which have lost their attractiveness as investment instruments in recent years.

“Stock market reflects reallocation of funds,” the CEA explained.

To ensure that a sharp correction does not happen, vigilance should be increased, he said.

He, however, refrained from suggesting any tax measure to check hot money inflows to the share market, saying this is something only the government can decide.

Subramanian also flagged the risk posed to the economic growth by rising oil prices, which could stoke inflation and lead to a possible tightening of interest rates. Beside, a continued surge in the global oil could also trigger stalling of foreign investment inflows, leading to a crash in the share markets from elevated levels, he said.

He accepted that the government has failed to anticipate the rise in international oil prices which have surged far beyond its expectations of %55-60 a barrel.

About the fiscal situation, he said the market is misinterpreting extra borrowing of the Centre and state governments. He said that the additional Rs 60,000 crore being borrowed by states this fiscal is meant to refinance loans already taken from National Small Savings Fund (NSSF) and is not a new borrowing.

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