Vijay Kumar Gaba

 “Fourth Industrial Revolution” is one of the most popular buzzwords these days. One gets to hear this almost every day in one context or the other. Business leaders, administrators, policy makers and money managers etc. have been using it in their presentations and interactions. In some cases it is used as a cliché, without intending any specific trend or opportunity. However, in most cases it is used to imply that new technologies and applications being used in the areas like manufacturing, mobility, communication, healthcare, education etc. are bringing remarkable change in the ways we are used to function. Metaverse, Clean Fuels, 5G, Drones, Artificial Intelligence, Convergence of Technologies, Blockchain, etc. are some of the pieces that are putting this revolution together.

For the youngest generation, the changes this revolution is bringing to their lifestyle might not appear stark. They were born in a world where technological changes have been fast, dramatic and disruptive. For the older generation, however, the experience is overwhelming.

The pandemic has added another dimension to the extant global development paradigm. A larger number of people are now looking for evidence to assess if we human being were less “happy” before we started to study and research the functioning of universe, cosmic events, natural phenomena like gravity & relativity, adopted the modern science and technology to carry out our day to day functions, trade and commerce, etc. In fact, if we do honestly assume "happiness" as the "ultimate goal" of all our social and economic activities; then most parts of modern science and technology may appear redundant to us.

An esoteric explanation of the fourth industrial revolution could be that we as a scientifically evolved society are trying to complete the circle by connecting the present to the point where it all started. Some indicators of this endeavor could be seen from the following trends:

·         We are increasingly accepting the Sun and Water as the primary source of energy and nutrition. Terms like chemical free, carbon free, etc. command the highest premium. Smoke rising from chimneys that symbolized earlier industrial revolution is considered regressive now.

·         We are increasingly preferring to stay in our respective caves, leaving the job of hunting and bringing food to few warriors (ecommerce, food delivery, work from home, video conferencing etc.)

·         The commitment to family and society is diminishing. “Individual” rather than the “community”, is becoming the focus of most activities, including sales & marketing, politics, religion, etc.

·         “Tribes” are becoming smaller and inward focused.

·         Procreation is not a priority for a significant proportion of the global population. In the next five decades we might see the global population stagnating or even declining.

·         The laws of the jungle have gained acceptance in most jurisdictions. The interest of the strong is accepted as justice even in the most developed societies. Lions and Elephants act at will while the rabbits and deer wait in horror to be devoured.

 In the past one month, the bond yields in most of the developed world have risen sharply, devastating the bond portfolios, especially the leveraged portfolios. Even most emerging markets have seen their bonds declining in value. Consequently, the global currency markets have also seen high volatility. The USD index has reached the highest level in two decades, as JPY, EUR and GBP have declined to lowest levels in decades. Even PoBC is cutting the reference range for CNY sharply and USDINR is at historic lows.

The sharp rate hikes in most parts of the world, and tighter money markets have so far not been able to rein the runaway inflation. It is expected that the central banker may continue hiking aggressively for another quarter at least. Accordingly, the forecast of a severe recession in 2023 in most parts of the western world on both sides of the Atlantic is fast becoming a consensus.

Poor demand outlook due to recessionary conditions is causing severe correction in the commodities markets. Industrial metals and crude oil have corrected sharply. The shipping container rates have also collapsed. Even if we normalize the commodity prices and container rates for the Covid related abnormalities, we are heading towards prices lower than the average of 2018-19.

In all this global turmoil, the most puzzling piece is precious metals. Both gold and silver have not behaved in the expected manner. Traditionally, during periods of high inflation, geopolitical uncertainties, war, money-debasement (due to quantitative easing or hyperinflation) etc. gold and silver had provided a safe haven, protecting the wealth of investors. In the latest episode of crises, precious metals have actually belied their safe haven status.

Despite, inflation ruling at four decade high level; Russia-Ukraine war; tension in the China Sea; and massive money debasement (US Fed alone printing US$7trn in the past 30months), international gold prices have actually fallen over 10% since January 2021 in nominal USD terms. In real terms, the losses are even more. Though, in GBP and EUR terms gold prices are higher, but certainly not commensurate with the circumstances and historical trends.

The trend in gold prices becomes even more intriguing, when we factor in the requirements under Basel III regulations that may require much higher holdings of physical gold by the global central banks. In fact a number of central banks like Bundesbank, PoBC, Central Bank of Russian Federation, RBI, etc. have increased their holdings of physical gold in the past 4years.

A few months ago, I had expressed my apprehension that yellow metal might be losing its luster (see here). The recent trend further strengthens my fear that in the new global order that is emerging post the pandemic, Gold may not be a key component. Declining consumption demand (the share of gold & silver ornaments has fallen below 1% in Indian household savings, from 1.7% just 5yrs ago, see here); competition from digital currencies; higher security risk and higher cost of security; and rising cost of production etc. are some factors that seem to be working against the gold.

Nonetheless, I am inclined to believe that we may get a very good trading opportunity in gold sometime in the next twelve months. I shall look to allocate some tactical money towards gold, if it falls another 8-10%.

The latest edition of the Handbook on Indian Statistics released by the Reserve Bank of India (RBI) depicts some interesting trends in domestic savings. Gross Domestic Savings (GDS), which was recovering steadily post demonetization, has again declined post Covid. However, the decline since FY17 is entirely due to lower savings in the corporate sector. The household savings have actually risen sharply, especially during Covid.

Contrary to popular perception, the Indian households are allocating much less to the capital market products (shares and bonds) post Covid. Even contributions to the provident funds have declined materially, indicating lower employment in the organized sector. Bank deposits have seen an increase. The contribution of Indian households to Investments (Gross Capital Formation) is stable at the elevated levels seen post demonetization, implying a rising trend towards self-employment.

Key trends

·         Gross Domestic Savings (GDS) in India that had recovered from Rs48.2trn in FY17 to Rs 60trn in FY19, declined to Rs55.9trn in FY21.

·         Household’s share in GDS increased from 58% in FY17 to 79% in FY21. During Covid it increased from 65% in FY20 to 79% in FY21. At the same time the share of the private corporate sector in GDS declined from 34% in FY17 to 30.6% in FY21.

·         The share of financial assets in household’s total savings has seen an increase from 41% in FY17 to 52.5% in FY21. In the same period the share of physical assets declined from 57.2% to 46.7%; and the share of gold and silver ornaments fell from 1.7% to 0.9%.

·         Contrary to popular perception the share of allocation to capital markets (shares and debentures) fell from a high of 9% in FY17 to 3% in FY21.

·         Household share in investment has increased from 32% in FY17 to 38% in FY21.

Indications

Post demonetization and GST, the private sector profitability (hence savings) have been impacted.

Households are increasingly becoming cautious. They are controlling their consumption and adding to savings.

Employment conditions may have worsened. More households are engaging in self-employment.

Deployment of savings in physical assets like personal vehicles, housing etc. is being avoided to maintain liquidity.

Risk appetite has been impacted adversely; and households are preferring safer bank deposits over riskier capital market assets.

 One of the earliest expressway projects in India was the golden triangle expressway connecting the tourist circuit of Delhi-Agra-Jaipur. The project was completed years before the National Highway Development Project (NHDP) was announced in late 1990s. It is only appropriate that the government has planned India’s first National Highway for Electric Vehicles in this golden triangle. Last week, a trial run of NHEV was conducted on a 248km highway between Delhi and Jaipur.

Agra-Delhi-Jaipur will be the first 500km EV corridor programmed and to be operated by Advance Services on Social and Administrative Reforms (ASSAR). ASSAR would be operating 12 such corridors marked by the Union Power Ministry. On all these corridors, vehicles, chargers, civil & electrical infrastructure, fleet & station utilities and all other components would be engaged together on Annuity Hybrid E-Mobility (AHEM) model with single capex spend from PSUs and Banks.

Agra-Delhi-Jaipur NHEV marks the beginning of an exciting journey towards the goal of full Zero Emission Transportation (ZET) over the next 3 decades.

Recently, India’s premier policy research institution, NITI Aayog, and RMI, an independent nonprofit that transforms global energy systems through market-driven solutions, published a detailed report outlining a roadmap for achieving complete ZET in the freight road transport sector by the year 2050. The report titled “Transforming Trucking in India – Pathways to Zero-Emission Truck Deployment” highlights the roadmap for making India a crucial player in the inevitable transition to zero-emission freight vehicles.  

The key points highlighted in the report include the following:

1.    ZETs can lead to sustained logistics cost savings. Transportation costs are a major driver (62%) of overall logistics costs in India, accounting for 14% of India’s GDP.5 Since diesel fuel costs account for the overwhelming majority of transportation costs, ZET adoption can dramatically lower associated fuel costs by up to 46% over the vehicle's lifetime, with broad implications for the Indian economy.

2.    A robust domestic ZET market can transform India into a global green hub for battery manufacturing. ZETs would be a significant source of demand for domestically produced batteries (up to 4,000 gigawatt-hours [GWh] cumulative through 2050), supporting and underpinning the National Energy Storage Mission and providing the impetus for the nation to become a low-cost and low-carbon manufacturing hub.

3.    If produced at scale, the total cost of ownership (TCO) for ZETs in the MDT segment can be less than diesel trucks, and TCO parity can be reached in the HDT segment by 2027. Currently, ZETs have a higher upfront cost compared to diesel trucks, but ZETs also have significantly lower per-kilometre operating costs.

4.    With supportive policies ZETs can achieve an 85% sales penetration by 2050. With cost competitiveness, and technology maturity, nearly 9 in 10 trucks sold in 2050 can be ZETs

5.    ZETs can help shift India off oil import dependency, supporting the vision of a self-reliant India. Today, road freight accounts for more than 25% of oil import expenditures—and is expected to grow over 4x by 2050. ZET adoption can eliminate a cumulative total of 838 billion litres of diesel consumption by 2050, which would reduce oil expenditures by ₹116 lakh crore through 2050.

6.    Widespread ZET adoption could reduce cumulative trucking particulate matter (PM) and nitrous oxide (NOx) pollution by ~40% by 2050, substantially improving air quality in India. Today, trucks represent just 3% of the total vehicle fleet (including both passenger and freight) yet are responsible for 53% of PM emissions.6 A purposeful transition to ZETs can lead to considerable improvements in air quality and benefit citizens’ public health.

7.    Widespread ZET adoption could reduce annual trucking carbon emissions 46% by 2050, lowering the nation’s greenhouse gas (GHG) emissions. The trucking sector is responsible for one-third of transport-related CO2 emissions in India. A determined transition to ZETs can lead to 2.8–3.8 gigatonnes of cumulative CO2 savings through 2050, which is equal to or greater than India’s entire economy-wide annual GHG emissions today.

8.    The early state of the overall ZET market in India requires a coordinated ecosystem approach spanning the public and private sectors. Such an approach can help overcome challenges such as the upfront capital needed to make the ZET transition through a combination of finance, technology, infrastructure, and policy strategies.

Indubitably, this remarkable transformation to ZET will present a once in a century type investment opportunity for both businesses as well as investors.

 “Higher interest rates, slower growth and a softening labor market are all painful for the public that we serve, but they’re not as painful as failing to restore price stability and having to come back and do it down the road again.” – Jerome Powell, Chairman of the US Federal Reserve

The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) decided to hike the policy rate by another 75bps taking the federal fund rate to 3.0%-3.25% range; the highest level since 2008.

In the post meeting press statement, the Fed chairman Jerome Powell reiterated Fed’s commitment to bring down the inflation to its target level of 2%. The Fed officials indicated that the Fed would keep hiking rates further till the terminal rate of 4.6% is reached next year. This implies another possible 75bps hike in November, followed by a couple of smaller hikes in the two subsequent meetings. Quelling the market expectations of a cut next year, the fed officials hinted that no cut is seen in 2023.

Six of the nineteen FOMC members even see the terminal rates at 4.75%-5%, implying a 175bps further hike till 2023 end, before the Fed begins to scale down in 2024, bringing the rates back to below 3% only in 2025.

It is pertinent to note that there is no precedence of Fed hiking so aggressively since 1990 when the overnight funds rate was adopted as its primary policy tool. In 1994, Fed had hiked 2.25%, resorting to cuts the very next year. US Inflation had probably peaked at 9.1% ( CPI, yoy) in June, before easing to 8.3% in August.

Indicating a recession-like condition in 2023, in their quarterly estimate of rate and economic outlook, FOMC stated that unemployment rate may rise sharply to 4.4% in 2023 from the present 3.7%. FOMC scaled down its estimates for economic growth in 2023 to 1.2% and 1.7% in 2024, reflecting a bigger impact from tighter monetary policy.

From this month, the Fed has also accelerated its quantitative tightening program with US$95bn/month reduction in its US$8.9trn balance sheet.

The Fed decision did not bring any surprise for the market, as the consensus was for a 75bps hike, with a minority expecting even a 100bps hike.

·         The US benchmark indices ended the day with sharp cuts after a highly volatile session.

·         USD Index (DXY) strengthened to over 111, its highest level since April 2002.

·         Industrial metals and crude ended with over 1% cut, while Silver (2.2%) and Gold (0.6%) were higher. Bitcoin lost over 2%.

·         Bond markets quickly priced in the growing risk of a recession as the Treasury yield curve further inverted. The 2-year treasury yield over 10-year Treasury yield inverted to beyond 50-basis points.

Indian markets are also expected to open with a cut of about 1%.

In a world where almost every central banker is struggling to contain inflation and tightening monetary policy, the People’s Bank of China (PoBC) seems to be facing a different set of problems and hence adopting a divergent policy approach. PoBC has actually cut the key loan prime rate (LPR) twice in 2022.

It is pertinent to note that the Chinese economic growth has been on the decline ever since the global financial crisis. The pandemic has slowed the growth even further. The latest growth data suggests that the Chinese economy is growing less than 5% this year, its lowest growth rate in at least three decades. Some part of the growth decline could be attributed to the zero tolerance policy towards Covid and stringent lockdown; but it is important to keep the declining trend since 2010 in mind.

Considering that China has been one of the key growth drivers of the global economy; declining Chinese economy is a matter of concern for all.

Besides, China has been one of the primary (i) financiers of the deficit budgets run profligately by many western economies; (ii) investor for the development projects undertaken by the Middle-East and Central Asian and African emerging economies; (iii) exporter of deflation through low rates, taxes and wages to the world; and (iv) absorber of the carbon emission for many developed and developing countries which chose to offshore their polluting manufacturing to the Chinese shores. Obviously, a weaker Chinese economy is a major concern for a large part of the world.

In the Evergrande episode (read here) we saw how much the global markets are sensitive to a financial crisis in China. In principle, the western democracies may not like the authoritative political regime of China, but the global investors’ confidence in the Chinese markets is mostly driven by this very regime; as it lends confidence to the investors that any crisis will be contained almost instantaneously. As President Xi Jinping gets ready to be elected for a record third term later this year, it would be important to see how he keeps alive the faith of global investors, who have not made money in Chinese markets for almost a decade now.

The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) is scheduled to announce its latest assessment of the economy and its policy stance tomorrow. A large number of market participants are waiting to hear the Fed chairman, with bated breath. I expect a large number of traders in India to stay awake till midnight to hear Mr. Powell, even though they cannot initiate any trade until 9:15AM on Thursday, when the Indian markets open for trading. Therefore, literally speaking, losing sleep to hear the Fed statement is of little consequence.

The market consensus is for a 75bps hike in the policy bank rate and an unambiguous hawkish stance unlike the previous statement in July, when the Fed sounded little ambivalent about the future hikes. Some experts are expecting even a steeper 100bps hike and raise in the terminal bank rate target to 4.5% (from previously estimated 3.75-4%) by April 2023. This implies a total of 200bps expected hike between September 2022 and April 2023; the steepest hike in the past two decades.

Since March 2022, when the Fed started to hike rates to bring down the inflation, an interesting contest has been seen between markets and the Fed.

1.    The benchmark S&P500 has moved higher after hearing the Fed on 3 of the 4 occasions. Obviously, the messaging of the Fed to the market was lacking in clarity and intent.

 

2.    One of the reasons for defiance of stock prices despite sharp rate hikes is that the Fed has not been able to materially influence the long term yields so far. The US yield curve has inverted sharply in the past six months, indicating that the markets are assuming a sharper recession and a quick reversal in the rate hike cycle (as early as 2H2023).

3.    The commodity prices have not yet corrected in line with the stance of central bankers and forecasts of severe recession. Bloomberg Commodity Index is still higher than the level it was at the beginning of the rate hikes in March 2022; and so has been the inflation. Consequently, the US rates have become sharply negative severely hurting the savers.

 

Obviously, more than the action, the Fed perhaps needs to tighten its messaging to the markets. For example, a clear message that the inflation is not seen coming below the Fed’s upper tolerance band at least till the end of 2023 and it would not be prudent to expect a rate cut before 2Q2024, could make the market reactions more congruent to the Fed’s policy stance.

 Self-reliance in the defence sector has been one of the major investment themes in the past one year in particular. Besides dedicated public sector defence manufacturers, the stocks of a large number of equipment and service providers to the Indian defence establishments have seen a sharp up move. In the melee to own “defence stocks” many investors have ignored the basic principles of investment and buying stocks of these companies at any price. It seems a little has been learned from the recent unwinding in pharma API manufacturers and internet stocks which witnessed similar traders’ interest in 2019-2021.

An informal discussion with some randomly selected market participants indicated that many individual investors and traders may not have a clear idea about the opportunity in the Indian defence sector. The way people tried to associate companies with the defence sector opportunity, it appeared that almost every company listed in India may be a potential beneficiary of the growth in the defence sector.

Companies manufacturing FMCG, alcoholic beverage, automobiles, white goods textiles, steel, cement etc could all be associated with the defence sector in some manner or the other. But, that is not the idea behind ‘defence self-reliance’ as an investment theme. This theme should focus on the indigenization of defence technology; material increase in local manufacturing of defence equipment and consumables; and export opportunities for defence equipment and arms.

For the existing dedicated defence suppliers (like defence PSUs) the opportunity may not be transformative as higher defence budget may result only in incremental growth for these companies. However, for some of the private sector service providers and manufacturers which have also been supplying to the defence establishments, the opportunity could be transformative.

To further elaborate my point, I would like to highlight a few points from the FY22 annual reports of some private sector “defence companies” that have been popular with the traders’.

NELCO Limited

No mention of the word ‘defence’ in the annual report. The management however emphasized on the new opportunities for the Satcom industry in the Indian space sector. The report reads, “Indian Space sector has been identified as an important sector for growth by the Indian Govt. Many new business models and collaborations are emerging, which are likely to provide new opportunities for the Satcom industry. Some of the next-gen technologies are also likely to move into the mainstream.”

(For a Sales CAGR of 7% over the past 10yrs, an RoE of 19%, and 10yr PAT CAGR of 11% the stock of the company trades at 132x PE for TTM earnings.)

Astra Microwave Products Limited

Performance: The Company has been able to create a solid diversified order book on the back of our deep domain expertise. With our proven track record, we are well placed to capture a bigger pie of the Indian defence sector market which is growing at a fast pace on the back of various government initiatives like IDDM, MAKE-II. Our order book as on 31st March, 2022 stood at Rs. 1,551 crores which is executable in the next 12 to 30 months period. Our current order book is 2 times of our FY22 revenue, which gives considerable visibility for next few years revenues. During FY22, we have received orders worth Rs. 760 Crores.

Opportunity: We see opportunities coming in from various programs planned by the Government through Defense Research labs (DRDO) and from the Make-II opportunities from the Ministry of Defence (MoD). Many of these are, especially in radar and electronic warfare systems where we have proven expertise. We believe going forward, our revenue mix will increase in the domestic area as compared to the last three previous years which should give an improved bottom line. We have clear opportunities of about Rs. 3,000 crores for next three years out of a market potential of about Rs. 14,500 crores upto year 2028.

(For a Sales CAGR of 14% over the past 10yrs, an RoE of 7%, and 10yr PAT CAGR of 2% the stock of the company trades at 70x PE for TTM earnings.)

Data Patterns (India) Limited

The latest annual report of the company discusses the recent developments in Indian defence sector, including policy changes and targets, in detail.

The report also presents a SWOT analysis of the company in defence related production. The Company inter alia, listed (i) Robust domain capability in Radars, Electronic Warfare, Communication systems, Avionics & Satellite Systems; (ii) All product development competencies under one roof; (iii) 100% in-house design and manufacturing capability; and (iv) Scalable business; potential to build complete systems as its core strengths. It also mentioned the growing size of defence sector opportunity for the private sector and improving export potential.

(For a Sales CAGR of 44% over the past 5yrs, an RoE of 24%, and 5yr PAT CAGR of 163% the stock of the company trades at 64x PE for TTM earnings.)

Paras Defence and Space Technologies Limited

Performance: The Company is engaged in designing, developing, manufacturing and testing of broad categories of defence and space engineering products and solutions. It is the sole Indian supplier of critical imaging components such as large size optics and diffractive gratings for space applications in India. Our revenue from operations increased by 27.37% to Rs182.56cr for Fiscal Year 2022 compared to Rs. 143.33cr for Fiscal Year 2021.

Opportunity: The Ministry of Defence has implemented a major reform for export promotion. Defence exports from India have expanded to more than 75 countries in the world. Due to the shifting geopolitical landscape, small nations are concerned about their safety and security and are considering India as a strategic partner for procuring affordable and high-quality defence equipment. The market for defence equipment is, therefore, anticipated to grow further. The government is also continually laying emphasis on the indigenisation of the defence sector.

(For a Sales CAGR of 30% over the past 5yrs, an RoE of 13%, and 5yr PAT CAGR of 68% the stock of the company trades at 89x PE for TTM earnings.)

Ashok Leyland Limited

Performance: In FY22, your Company supplied all time high 1,125 units of completely built-up units (CBUs) including bullet proof vehicles and 600 kits. Your Company is proud to complete the execution of 711 Ambulances in record time under emergency procurement of Indian Army. Further, your Company is expanding its portfolio in Light Vehicles, new applications on Super Stallion platform and products specific to export markets.

Opportunity: No mention

Tata Motors Limited

No separate mention of Defence business or growth opportunity in defence sector.

The company sold certain assets related to defence business to Tata Advanced Systems Limited (TASL) for sale consideration of Rs234.09cr.

 In a recent research report, Goldman Sachs estimated that “energy bills will peak early next year at c.€500/month for a typical European family, implying a c.200% increase vs. 2021. For Europe as a whole, this implies a c.€2 tn surge in bills, or c.15% of GDP.” The bank believes that repercussions of this “will be even deeper than the 1970s oil crisis.” Obviously, a problem of the magnitude would require an impactful policy intervention that could have wider and deeper implications for decades to come.

The policy interventions could involve partial suspension of free market mechanism; rationing of energy consumption; fiscal subsidies; deferment of climate goals and increased use of coal and/or accelerated shift to renewable sources of energy etc. Besides, there could be serious geopolitical implications also.

In another interesting paper, McKinsey & Co, outlines how inflation may be flipping the global economic script. In the paper McKinsey’s experts have examined many of the strategic implications of inflation. The key points highlighted in the paper could be summarized as follows:

·         In the past six months, inflation has far exceeded December 2021 expectations. In many countries, actual rates have doubled projections. European countries are particularly affected. Asia is seeing a less severe change: Indian inflation is about 7 percent, only a bit above projections; and South Korea is at 5 percent. In China and Japan, inflation remains muted.

·         In response to inflation’s alarming rise, central banks worldwide are raising their core bank lending rates. So far, however, rate raises in most countries have not matched the pace of inflation. The rising rates are expected to ease demand and lower prices for two critical components of headline inflation: housing and commodities such as energy and metals.

·         The lift-off in fertilizer prices, supply chain snags, drought, along with other fallout from the war in Ukraine, has pushed prices for basic foods much higher. Since 2021, food prices have risen to their highest level since the United Nations’ Food & Agriculture Office began its index. Prices today are considerably higher than in past surges in 2008 and 2011.

·         As economies stabilized and reflated post Covid, real wages began to creep higher again. But rampant inflation checked that growth, rising so fast that it has diminished the purchasing power of people’s take-home pay. For example, workers in the United Kingdom today have seen their real compensation fall by roughly 8 percent year-on-year.

·         As prices soar, and show few signs of abating, the risk is that inflation becomes entrenched and central banks will have to raise rates more assertively to slow demand. The growth may slow down much more than previously estimated.

The global economy is therefore entering a prolonged phase of correction and realignment. For many these corrections may be extremely painful, while for some it could provide an opportunity to enhance their position in the global order. India, being one of the least impacted countries in this global turmoil, hopefully would fall in the latter group. Amen!

 In the current year 2022, inflation in India has consistently remained above the RBI tolerance band of 2-6%. For the month of August Consumer Price Inflation (CPI) was 7%, led primarily by the food inflation of 7.6%. Both rural and urban inflation recorded a MoM rise in August. Unfavourable weather conditions apparently led to sharp rise in the prices of vegetables, fruits, spices etc. However, the core inflation (CPI ex food and fuel) has also persisted over 6% since the past many months; emphasizing the persistent pricing pressures. The IIP growth in July also moderated to 2.4% led primarily by consumer non-durables – indicating pressure on household finances. The sharp rise in household debt, especially the expensive credit card rolling credits, also corroborates the rising stress on household finances.

In view of the elevated price pressures, the Monetary Policy Committee (MPC) of RBI is expected to keep raising rates in line with the global peers. The market consensus is expecting the policy repo rate to rise to 6% (currently 5.40%) by the end of 2022. In his latest statement, the RBI governor stated that he does not expect moderate hikes in policy rates and elevated prices to hurt the growth materially and the economy may still retain the momentum to grow 7% in FY23.

The RBI estimate of growth may be optimistic in view of the poor Kharif crop estimates; challenges to exports; rising interest cost and poor consumption growth outlook. The risk of a global energy crisis in winter is also looming large and could have some negative implications for our inflation and growth outlook.

Inarguably, the claim of the finance minister that India faces zero chance of a recession is tenable. But a growth of 5-6% on a low base would be nothing to celebrate in our circumstances.

Obviously, the financial markets are disregarding the macroeconomic conditions and focusing on micro opportunities, especially the ones driven by policy impetus. In particular the following are some identifiable drivers of the stock markets in the recent up move.

1.    Strong emphasis on enhancing local defence procurement, especially in view of the global sanctions on our largest supplier (Russia) and elevated Chinese threat. The global sanctions on Russia have also presented an opportunity to Indian manufacturers to gain some foothold in global defence equipment and missiles markets; where the efforts of Indian entities, made in the past many decades, have started yielding results. The stocks of the companies that could be potential gainers from higher local defence procurement are favourites of investors as well as traders.

2.    Realignment of global supply chains in the post Covid world is expected to trigger a new capex cycle in Indian manufacturing sector. The potential beneficiaries of this capex cycle like capital goods manufacturers are also gaining traction with market participants.

3.    The most favourite sector in Indian markets is the financial sector. The cleaned up balance sheets after years of efforts and increased margins as the rate cycle turns up are attracting massive investor interest to the sector.

4.    The energy crisis in Europe and the US is also creating opportunities in Indian markets. For example, prohibitively higher energy cost has rendered significant industrial capacities (especially in high energy consuming sectors like chemicals) unviable. Closure of these capacities is allowing some Indian manufacturers to gain market share as well as better pricing power.

5.    The trends in energy security and climate control (green energy, electric mobility etc.) are also leading greater investor interest in the related businesses.

6.    Given the poor growth outlook in Europe and China, the FPI flows have turned towards emerging markets like India. Significant positive flows over the past couple of months have also helped Indian equities to outperform its global peers.

It seems the divergence between the equity market performance and macroeconomic conditions may continue or even widen in the short term. However, over a longer period, say 12-15 months, both invariably converge. Till then its happy times for the investors and traders.

 One of the most famous dialogues delivered by legendary Shahrukh Khan goes like this – “Agar kisi cheez ko dil se chaaho to puri kayanat usey tumse milane ki koshish mein lag jaati hai” (If you desire something from the depth of your heart, the entire universe would conspire to fulfil your desire.)

Recently, the Global CEO of McKinsey & Co, Bob Sternfels forecasted that. The factors like a large working population, multinational companies reimagining global supply chains, and a country leapfrogging at digital scale-to achieve something special not just for the Indian economy, but potentially for the world, are aligning well to to make 21^st century – the Century of India. (Read here)

It appears that the universe is conspiring to make 21^st century - the century of India; but the question is whether we Indians are indeed aiming for this goal with full honesty and intensity.

Historically, the Indian entrepreneurs were constricted by the culturally strong agriculture mind-set dominated by contentment and complacency. The hard working and intelligent people missed the entire industrial revolution as a consequence. To some extent colonial rule could be held responsible. But largely it was the mind-set that was responsible.

Post-independence, most entrepreneurs could not think long term, hence did not invest much in R&D activities. They would rather import technology and pay royalty for it. Furthermore, most entrepreneurs were easily satiated. Complacency would easily meander through their enterprise. Mostly, a few which had widely travelled, worked or studied abroad did only think big.

The governments also preferred less consumption over more production. Rationing of everything was the policy for more than three decades. You needed to pay an annual license fee for owning a radio set and bi-cycle. Long queues for cement, sugar, scooters, telephone, cars, kerosene, diesel, passport, were the order of the day. The people accepted this as a way of life and entrepreneurs mostly focused on manoeuvring around the rules to garner whatever resources and market share they could.

However, the generation born post 1991 is not constricted by the traditional agriculture mind-set. This generation has not experienced long queues for basic necessities of life. These people were born with colour televisions beaming many channels through satellite in their homes; a variety of cars & motorcycles, telephones, gas connections, available on demand.

This post 1991 generation is now out of the business schools and helming the business affairs. These young men are hungry; not afflicted by the traditional agriculture mind-set; are global in their vision; possess strong technical & managerial skills; and have resources to take risks. They do not stutter while talking about billion dollar deals. Their role models are the likes of Jeff Bezos, Steve Job, Larry Page and Mark Zukerberg.

Governments post 1991 have also been supportive of businesses. They have made efforts to add global scale capacities in numerous sectors and policies have been oriented towards globalization of the Indian economy encouraging businesses to grow in scale and reach.

Anyone could see the change not only through numerous technology enabled start-ups, but through traditional businesses like Haldiram and Bikanerwala. I can now easily get my favourite Chaubey ji spices from Agra and pickles and chutneys from Prakash Namkeen Indore in less than a week.

This side of the picture appears all geared to define the economic history of India in 21 century. However, there is another side of this picture that does not appear as promising.

For one, a much larger section of youth is disillusioned. They are not only distracted from the core issues of development, growth and global competitiveness; but may be unintentionally working as a counter force to these goals. Unfortunately, a section of politicians is actively manipulating these disillusioned youth to promote their ulterior motives.

Secondly, a much larger section of the population is getting left behind in India’s race to become a global force. Since these left behind people form a significantly large majority; the politics of the country shall remain focused on their survival. The policy making function shall therefore always remain at risk of slithering back to ultra-socialist tendencies, impacting growth of businesses; besides the spectre of disruptive civil unrest will always keep lurking.

It is therefore utmost important that the development and growth ecosystems are tuned to the imperatives of inclusiveness and sustainability. “Sabka Saath and Sabka Vikas” needs to become the core of all growth & development effort; else the risk of failure, like Brazil, Mexico, Argentina, Russia, et. al. shall keep looming large, impairing the chances of India ushering the world into 22^nd century.

 1.   Bengaluru inundation

In the first seven days of September 2022, Bangalore Urban District of Karnataka received 171mm of rain, which is 388% more than the long term average (35mm) of the rains it receives during this period. Obviously, the city infrastructure is not prepared to manage so much water; hence some areas of the city have been inundated with rain water. The spectacle of houses, vehicles and roads under deluge has been enthusiastically celebrated in the media – mainstream, social, local, national and global. The residents also marked the occasion by riding on tractors, excavators, and boats etc.

Prima facie, there is nothing unusual in this. Almost every city in the country gets inundated at every instance of excess rain. From large metropolises like Mumbai, Delhi, Chennai, Kolkata, Hyderabad, to major cities like Lucknow, Bhopal, Ahmedabad, Jodhpur, Gurgaon, Patna, Varanasi, Ranchi, Bhubaneswar etc. have all experienced similar situations in the past few years.

We all discuss the inadequate infrastructure; poor planning; corrupt administration; blatant encroachments on public land; and sustainability issues for a couple of weeks and automatically shift to the other topics enjoying higher TRP on media as soon as the dark clouds wither away and flood waters recede. In recent times, people have also found issues of nationalism, regional pride, and immigrants’ apathy to local issues, in the flood waters. For example, people of Bengaluru have been told to tolerate the inconvenience in the interest of nation building and weaken the government on such trivial issues; and immigrants have been told to leave the city if they do not like it rather than demeaning the city by highlighting their problems.

Perhaps the Almighty has made us human like that only. It is our natural tendency to keep moving on – from the good and from the bad. Those who stop to fight the wrong or get attached to the good are usually demeaned and sidelined.

PS: One issue that never becomes part of the popular narrative is the accountability and responsibility of “We the people of India”. The people who bought houses built on the lands stolen from lakes; the people who ignored the conduct of their neighbors in encroachment of the public lands; the people who were indifferent to the potholes and blocked drains when it was not raining and people who got away with bribing the civic administration.

2.   Rishi Sunak loses UK PM bid

The ‘Son of India’ Rishi Sunak lost the bid for prime ministership of the United Kingdom. While in the United Kingdom the contest was mostly between policies and personal reputation; in India it was mostly between Imperialist Britain and its former Indian subjects. Millions of eulogies were prepared to celebrate Sunak’s elevation to 10 Downing Street. The patriots were already celebrating it as the revenge of India by conquering the throne of England. The public debate in India has ended with lamenting of Sunak’s loss as victory of racist whites over a colored suitable boy. Some of the staunch supporters have preserved a glimmer of hope safely for the next general election in the UK.

Incidentally, the popular narrative in India missed a small point that Sunak was born and brought up in England, by African Hindu (Kenyan Father and Tanzanian Mother) parents. His grandfather migrated to Africa from Gujranwala (now in Pakistan) before independence. There is no pertinent evidence available to show that he has favored India or Indians in his capacity as British parliamentarian or senior cabinet minister.

Unfortunately, a large proportion of people desperately wanting to see Sunak as UK prime minister and calling the UK politics racist, are those who found the idea of Sonia Gandhi becoming India’ prime minister devastating and nauseating.

Some of these may have even castigated the young brilliant cricketer Arshdeep Singh as anti-national and secessionists (Khalistani) for just dropping a catch in a recent India Pakistan match.

3.   Cyrus Mistry dies in a car crash

A renowned businessman and former chairman of Tata Sons, Cyrus Mistry, died in a car accident last Sunday. The car was being driven by a highly reputable gynecologist and also had two of her close family members travelling in it. Two passengers, including Mistry, died immediately, and the other two are seriously injured.

The shocking event has been mourned by the top politicians and business people of the country. However, Ratan Tata, the Chairman Emeritus of Tata Sons and Tata group was rather conspicuous in not making any public obituary. It is pertinent to note here that Tata and Mistry were engaged in a bitter battle of control over Tata Sons a few years ago, which Mistry lost in the Supreme Court.

As Chairman of the group, Mistry had questioned many decisions of his predecessor Ratan Tata that destroyed significant shareholders’ value over the past decade. He argued that flamboyant management style and a spate of errors of judgment were seriously prejudicial to the interest of companies in which non-Tata shareholding was material. Only a handful of industry people and politicians supported Mistry at that time. It is also interesting to note that Mistry was not the first Tata Sons heavyweight to be ousted unceremoniously. Same was the case when the likes of Russi Modi, Darbari Seth and Ajit Kerker had spoken against Ratan Tata and were ousted from the group.

Post the accident, the highways minister has announced that wearing of seatbelts will be made compulsory for the back seat passengers also. Non-compliance shall be subject to a fine of Rs1000.

Without any doubts whatsoever, the accident is unfortunate and loss is tremendous. But it does need a few straight questions to be answered.

About 1.55 lac people died in road accidents in India in 2021. The number is rising almost every year. Why did the government wait for so many years and so many deaths to announce this basic safety measure?

The site of the accident is apparently a death trap. Many accidents have taken place at that point and many lives have been lost. Still there is no proper signage there. Who is taking responsibility for that? The government and the Supreme Court need to fix the accountability for all poor roads, especially the roads where toll is being charged. The concessionaire, contractor, NHAI, the municipal/PWD engineers, local representatives (corporator, panchayat member etc.) – someone needs to be held accountable for all accidents caused due to poor road maintenance.

 As per the news agency Bloomberg’s calculations using IMF database and historical exchange rates, the size of the Indian economy in ‘nominal’ cash terms at the end of March 2022 quarter was US$854.7bn vs US$816bn for the UK economy. By this standard, India was the 5^th largest economy of the world as on 31 March 2022, behind the USA, China, Japan and Germany.

This apparently innocuous, and mostly inconsequential, statistical data point has been subject of an intense discussion in India media – both mainstream and social.

The pro establishment groups have celebrated this data point as an important milestone in the resurrection of the Indian economy, especially under the stewardship of Prime Minister Narendra Modi. They have forcefully argued that the Indian economy surpassing the UK’s economy highlights the rising status of India in the global economy; and symbolizes the undoing of 200years of British slavery.

The groups opposing the establishment claims highlighted that the absolute number of GDP is meaningless. On the relevant parameters like per capita GDP, human development index, extreme poverty & hunger, etc., India lags far behind the UK. They argue that in fact, the position of India in most of these parameters has slipped lower in the past few years.

I see merit in both the arguments. The Indian economy growing despite all adversities and limitations over the past 75years ought to be a matter of pride for all the citizens. We are entitled to celebrate the achievements of our farmers, professionals, and entrepreneurs. At the same time it is also true that the pace and direction of growth is not adequate; and there is a scope to do much better. We need to address the quality and sustainability of the growth. The rising regional, social and individual disparities; inadequacies of growth in terms of human development and quality of life; and poor employment intensity of growth ought to be a matter of concern for the policy makers as well citizens.

Insofar as the statistics is concerned, in my view, the more appropriate benchmark would be China. Both Indi and China embarked on the journey of rebuilding the nation in late 1940s. In fact China started two years after us in 1949 when the civil war ended. Both started the process of accelerated economic reforms in the early 1990s. At that time both the countries had similar GDP and other economic conditions. Both the countries have similar demographics. However, the Chinese economy is now six times bigger than us.

One could argue that India and China are incomparable because of the vastly different political structure in these two countries. China has an authoritative regime and a significantly less transparent governance structure; whereas India is a reputable democracy with a more transparent and accountable governance structure. This is a fair point but certainly not incontestable.

The economy of the UK has been stagnating for over a decade now. The current GDP is almost the same as it was in 2014. The demographics have been worsening. Brexit has further slowed down the growth. It was a natural trend that India will surpass a stagnating UK, like it did with Italy, Australia and Canada in the past one decade, in due course. It may be a cause of celebration due to our colonial past, but there is little to celebrate in real economic terms.

It may be pertinent to note that the UK economy has been stagnating for almost a decade now. The latest GDP of the UK is almost similar to what it was in 2014. Brexit has also impacted the UK growth adversely. On the other hand, the GDP of India has been consistently growing, albeit at a much lower rate that what all of us would desire. India’s GDP would have overtaken the UK in 2017, if demonetarization had not slowed the pace of growth of India’s GDP. In the past one decade India’s GDP has overtaken the GDP of countries like Italy, Canada and Australia. It has meant little for India and Indians. The queue of Indians seeking to migrate to these countries has only become longer in this period.

At the current pace, it will take at least two decades for India to become a middle income country (per capita GDP at US$12000 from the present US$1961). Becoming a developed country like the UK, Canada and Australia will take much longer.

Celebrating every milestone in the journey is good; provided we do not lose sight of the destination. Celebrations that distract us from our goals are best avoided.