The Indian stock market has done tremendously well during the current government’s term. Analysts at UBS Securities India Pvt. Ltd said in a recent note that the average price-to- earnings multiple for the Nifty index has been 21 since mid-2014, using trailing earnings. During the preceding government’s term, that is under the UPA-II, the multiple stood at 17.6 on an average between mid-2009 and mid-2014.

But as the chart shows, this has nothing to do with improved earnings growth. On the contrary, average earnings growth for Nifty 50 companies stood at 5.3% in the current five-year term, which is much lower than the growth of 21.7% and 12.9% during the UPA-I’s and the UPA-II’s terms.

What drove valuations was the narrative around improving macro stability and reforms agenda, which helped improve investors’ confidence on India’s long-term growth potential, said analysts at UBS.

Now, as the government’s term is about to end, it is as good a time to do a reality check on the narrative. “This (reforms) narrative has seen some setback recently in the minds of investors, with announcements of farm loan waivers, stepping back from oil price deregulation and events around the Reserve Bank of India (RBI). Is this just pre-election course correction or something the market needs to worry about post May 2019, too?" UBS analysts wrote in a note.

It isn’t surprising that foreign investors were heavy sellers through 2018. While global slowdown worries caused some panic, the disconnect between the narrative and ground realities as well as the large gap between earnings and valuations, were too large to ignore. Perhaps it’s time optimistic domestic institutions also take note.