Do it yourself

As per the latest national accounts data released last week, the economic growth of India appears to be normalizing in 6.5% +/- 0.3% band. Optically, this growth rate may appear decent; but is insufficient for achieving the target of catapulting the Indian economy into a higher orbit and sustaining the status of a middle-income economy.

After recording a higher growth rate of 8.8% CAGR for three years (FY22 to FY24) on a low base of Covid affected FY20 and FY21, the FY25 growth is estimated to be 6.5%. The consensus estimates for FY26e growth are also hovering around 6.5%.

From the internals of the economic data, it appears that growth trajectory of the Indian economy is settling in the current band, just like we spent decades in the 3-4% growth band in the pre-reform (1990s) era. Any effort to accelerate the economic growth would require transformative socio-economic reforms in the next five years.

Some critical points that need to be watched closely from the perspective of growth sustainability and acceleration could be listed as follows:

·         The share of primary sector that employs the largest share of workers has deteriorated from 22.1% in FY21 to 19.8% in FY25AE. The share of the secondary sector has also declined from 25.6% in FY21 to 25.2% in FY25AE. Especially, the share of manufacturing in the GDP is low at 14%, and has not recorded any material improvement despite the material incentives like PLI, etc. FY25AE growth of manufacturing is estimated to a dismal 3.5%.

·         The gross savings rate of the economy has fallen to 30.2% of GDP in FY25AE, materially lower than 33.8 in FY12, when the new GDP series started. The investment rate has also fallen in this period from 39% in FY12 to 31.4% in FY25AE. The household & corporate savings and investments have seen decline in FY25E. The government investment and consumption has been supporting the investment rate to stay above 30% of GDP. The fiscal constraints are indicating that this support may weaken in the coming years.

·         Early reports are indicating that Rabi crop in many states has been materially damaged by unusually dry and warm winters. Sugar production for SS25 is expected to be ~14% lower; while wheat crop may be 25-35% lower. Oilseed and pulse crops have also suffered damage. This data will reflect in 4QFY25 and 1QFY26 agriculture GVA and private consumption numbers.

It is important to note that MFI sector is already burdened by a material deterioration in the asset quality. Poor Rabi crop may add to the rural stress and adversely impact the overall consumption demand, given that urban demand is not showing signs of improvement.

It is therefore very much possible that the actual FY25E growth comes lower than the second advance (AE) estimates.

·         The global trade uncertainties are rising with the passage of every hour. A situation of material trade logjam, supply chain disruption, accelerated tariff war and/or high volatility in currency markets is not completely improbable. If any such situation does materialize, it may materially hurt the growth prospects and external vulnerability of India. 

It was summer of 2013. The mood on the street was gloomy. The stock markets had not given any return for almost three years. USDINR had crashed 28% (from 53 to 68) in a matter of four months. GDP was on course to drop to 5.5% after growing at a rate of over 8% CAGR for almost a decade. Current account deficit had worsened to more than 6% of nominal GDP (the worst in decades). The Fx reserves of the country were down to US$277bn, sufficient to meet just 5 months of net imports. The confidence in the incumbent government had completely depleted. The people were on the street protesting against ‘corruption’ and ‘policy paralysis’.

The global economy had still not recovered from the shock of the global financial crisis (GFC). The thought of unwinding of monetary and fiscal stimulus provided in the wake of being unwound was unnerving most emerging markets ((Taper Tantrums), including India.

India, which was touted as TINA (There is no alternative) by the global investors just five years back and had become a key member of BRIC and G-20; was already downgraded to “fragile five” by some global analysts. This was the time when the government of the day took some brave decisions. One of these decisions was to appoint Mr. Raghuram Rajan, former Chief Economist and Director of Research at the IMF and then Chief Economic Advisor to the Government of India, as the 23^rd governor of the Reserve Bank of India (RBI). Mr. Rajan with the full support of then Finance Minister, P. Chidambaram, took several effective damage control measures, and was able to pull the economy and markets out of crisis within a short period of one year. USDINR gained over 11%, stocks markets recorded their all-time high levels, CAD improved to less than 1% of nominal GDP, real GDP growth recovered to ~7% (FY15).

The situation today is nowhere close to the summer of 2013. Nonetheless, the feeling is that we could potentially head to a similar situation in the summer of 2025.

Worsening external situation - rising global trade uncertainties due to the US unpredictable tariff policies, depleting Fx reserves, weakening USDINR, declining FDI and persistent FPI selling, pressure on the government to cut tariff protection for the domestic industry, and rising probability of a global slowdown.

Slowing domestic growth - Prospects of a poor Rabi crop aiding pressuring food inflation and RBI policy stance, crawling manufacturing growth, limited scope for any meaningful monetary or fiscal stimulus, etc are some of the factors that suggest the probability of any meaningful growth acceleration in the near term is unlikely.

Uninspiring policy response – The policy response to the economic slowdown and worsening of external situation is completely uninspiring so far. The measures taken by the government and RBI appear insufficient and suffer from adhocism.

For example, RBI has announced several liquidity enhancement measures in the past three months. These measures have been mostly neutralized by USD selling by RBI to protect USDINR and rise in the government balance with RBI (inability of the government to disburse money quickly to the states or spend otherwise. Risk weight cut for lending to NBFCs and MFI etc. is too little and too late. The damage to credit demand and asset quality in the unsecured segment is already done, and is not easily reversible.

The fiscal stimulus (tax cut on for individual taxpayers) could support the economy if at all, from 2H2025 only. There is a risk that the taxpayers in lower income segments (Rs 7 to 15 lacs) might use the tax savings to deleverage their balance sheets by repaying some of their high-cost personal loans etc. In that case this stimulus could have a negative multiplier on growth.

The short point is that (a) we are yet not in a crisis situation; (b) if not handled effectively and with a sense of urgency, the current situation may not take long to turn into a crisis.

The government, especially the finance minister and RBI, would need to urgently take several steps to take control of the situation and inspire confidence in the businesses and investors. Leaving it to the external developments, e.g., USD weakening due to falling bond yields in the US; energy prices easing due to Russia-Ukraine truce; trade normalcy restoration due to Sino-US trade agreement and normalization of Red Sea traffic; a plentiful monsoon easing domestic inflation; etc. may not be a great strategy - even if it works this time.

As they say – “it is great to have faith in God, but always lock your car”.

The general reaction to the Union Budget for fiscal year 2025-26 is mostly positive. Most people have appreciated the commitment to fiscal discipline. Substantial increase in the allocation for rural and urban development programs has apparently come at the expense of lower or no growth in the allocation for food, fuel & fertilizer subsidies, defense and transportation (road and railways).

The most celebrated aspect of the budget is the enhancement of tax rebate under section 87A from Rs25,000 to Rs60,000; and restructuring of tax slabs from the earlier three to six in the new scheme of personal income tax. These changes would result in a potential net tax saving of 2-6% of the post-tax income.

The most debated aspect of the budget is the allocation to the capital expenditure. Analysts are calculating the total allocation for capex using different matrices and thus debating in favor or against the budget.

The budget numbers assume a nominal GDP growth of 10.1% for FY26, which will roughly translate into a 6.5% real GDP growth. The Revenue Secretary, in an interview to the Economics Times, termed this as the trend growth (see here). He emphasized that “more structural measures” are needed to push this trend growth higher to 7%.

I find this the most concerning aspect of the present governance and market narrative. We seem to be totally disregarding the fact that 6.5%-7% real growth is merely sufficient to maintain the current trends in the development of social and physical infrastructure. To achieve the ambition of developed India (Viksit Bharat) all curves affecting the quality of life need to shift much higher. As highlighted by the latest Economic Survey, we would need a sustained 8%+ growth for a couple of decades to become a middle-income country (Viksit Bharat).

This budget or any other recent policy announcement of the government does not show any glide path in that direction. To this extent, the governance and market narrative suffer from an extreme degree of adhocism, opportunism and complacency. A total absence of discussions on structural reforms needed to catapult the economy to 8-10% growth orbit in the popular discourse is a worrisome sign. Being content with a few administrative changes and procedural efficiencies (mostly due to adoption of available technology) as “reforms” might not help much.

I would like to explain this situation with the help of four short stories, which I have narrated before also.

Freedom from bondage: There was this feudal lord, who had enslaved a number of peasants on different pretexts. He would make them toil hard the whole day and give two inadequate meals to survive. Occasionally, on festivals, birthdays of his children, his marriage anniversary, and death anniversary of his parents, he would treat them with a good meal and sweets. Once in 3-4yrs, during winters, he would give them new blankets so that they do not die of cold. In return, the bonded peasants were expected to hail him as protector and great benefactor of the poor. No one ever dares ask for freedom from bondage.

Eat ladoo and hail the minister: Once the home minister of a state visited the Jail on Independence Day. After finishing his speech, he distributed some sweets (Ladoo) and asked the inmates about their problems and what he could do for them. Most complained about mosquitoes and the quality of food. Few wanted new blankets. Some daring one asked for a large screen TV in the library. No convict asked for freedom. The minister granted their wishes and won their adulation.

Save me an extra half kilometer drive: A minister on his election campaign addressed a gathering of a housing society’s members in a posh Bengaluru location. The only request these educated upper middle-class people made to this politician was to “provide a right turn in front of the society gate, as they have to go 500 mtrs ahead to take a U turn” for travelling in the right direction; disregarding the fact that providing this “right turn” would be “wrong” as it would cause huge traffic disruptions and frequent traffic snarls in front of the society gate. No one asked him to give an undertaking that he would not encourage corruption, if elected.

Art of staying relevant: In the late 1980s, I had an opportunity to attend a budget committee meeting of a large medical college cum hospital. The twelve-member committee comprised two doctors, three administrative in-charge, district magistrate (ex-office), local MLA (govt nominee), and five prominent local citizens. The total annual budget of the college was close to Rs230 crores. The committee cleared 73 expenditure proposals worth Rs180 cores in less than one hour. The 74^th item of agenda was a bicycle-shed for Class-IV employees of the college/hospital. The budget sought for this item was mere Rs3.5 lacs. This would have helped over 200 employees coming to work on bicycle, as the scorching heat often resulted in deflation of bicycle tyres. The committee discussed the matter for more than two hours and rejected the proposal. Later, the dean of the college explained that this was the only item on agenda, besides salaries, which all committee members understood fully. They used all their wisdom in discussing this item and saved Rs3.5 lacs for the college, thus justifying their relevance to the college and society! 

The market action in the past three days has been quite exciting. It reminded me of the market action witnessed during March-April 2020, in the wake of the outbreak of Covid-19 pandemic. Drawing from the experience of 2020, like many, at first, I was also tempted to increase my risk exposure to Indian equities. However, on second thought, I have decided to reign my temptation and avoid any deviation from the “plan”.

I note that the 2025-2026 market trajectory may not be similar to 2020-2021, for some very simple reasons.

·         Ignoring the panic fall in February-March 2020 and subsequent recovery, Nifty 50 gained 12% in 2020 and another 16% in 2021. These gains occurred because corporate earnings were coming out of a 10yr growth drought. Nifty EPS has grown over 225% in the past five years (FY21-FY25), against just 50% growth witnessed in the preceding decade (FY11-FY20). The growth trajectory is now moderating and is more likely to stabilize in 11-13% CAGR range in the next couple of years.

·         Presently, Nifty 50 forward consensus PE is marginally higher than the long term (10yr) average. With earnings growth moderating, there is no reason for the PE to re-rate to the higher levels. If at all, it can slightly de-rate to the long-term average. This implies that Nifty 50 returns are most likely to be in tandem with the earnings growth (11-13%), in the next couple of years, with some downside risk.

·         2024 has witnessed a record Rs5.26 trillion domestic flows into the local secondary market alone. Accounting for flows into primary markets, unlisted securities and foreign equities, domestic flows would be much higher. Expecting this kind of flow to sustain during 2025-2026 also, would be unreasonable. Given the currency weakness, higher cost of capital (bond yields) and rising uncertainties, foreign flows may not see a significant reversal from the 2024 trend, where foreign investors were marginal sellers (adjusted for buying in primary market).

·         The economic growth in 1HFY25 has been much below the expectations. No major recovery is expected in 2HFY25 and 1HFY26. The actual government capex for FY25 is expected to be much lower than the budget estimates. There are reports which suggest that the capex budget for FY26BE may not see any material growth. This trend raises reasonable doubts over the sustainability of the higher than historical valuations of the sectors and companies that were expected to benefit from higher government capex. For example, infra builders, PSEs, railway equipment suppliers, etc.

·         Financial sector, especially public sector banks, have contributed materially to the market buoyancy in the past four years. The rally in these banks was led by recapitalization, NPA resolution/recovery (asset quality improvement), margin expansion and high credit growth. None of these factors may be contributing in the next two years. Asset quality and margins have mostly peaked, and credit growth is moderating.

·         Last but not the last, one of the keenly watched indicators - the Market cap to GDP ratio – is at an all time high. With nominal growth trajectory settling at single digit level, and IPO activity remaining strong, the risk of market cap of the existing listed stocks correcting cannot be ignored.

The Reserve Bank of India (RBI) recently released the results of its latest forward-looking surveys (November 2024 Round). Based on the feedback received from the respondents the survey results provide important insights with respect to consumer confidence, inflationary expectations and economic growth expectations.

Consumer confidence – Present tense, hopes high for future

The survey collects current perceptions (vis-à-vis a year ago) and one year ahead expectations of households on general economic situation, employment scenario, overall price situation, own income and spending across 19 major cities.

As per the survey results, Consumer confidence for the current period declined marginally owing to weaker sentiments across the survey parameters except household spending. The current situation index (CSI) moderated to 94 in November 2024 from 94.7 two months ago. (A value below 100 indicates a state of pessimism)

However, for the year ahead, consumer confidence remained elevated, improving 50bps from the previous round of Surveys. Households displayed somewhat higher optimism on one year ahead outlook for major economic parameters, except prices. The future expectations index (FEI) stood at 121.9 in November 2024 (121.4 in the previous survey round).

The respondents’ sentiments towards current earning moderated marginally, they displayed high optimism on future income which was consistent with their surmise on employment conditions. Households anticipated higher spending over one year horizon on the back of higher essential as well as non-essential spending.

Household inflationary expectations rise

Households’ perception of current inflation rose by 30bps to 8.4%t, as compared to the previous survey round. Inflation expectation for three months horizon moderated marginally by 10 bps to 9.1 per cent, whereas it inched up by 10 bps to 10.1 per cent for one year ahead period.

Compared to the September 2024 round of the survey, a somewhat larger share of respondents expects the year ahead price and inflation to increase, mainly due to higher pressures from food items and housing related expenses. One year ahead, the price expectation of households is closely aligned with food prices and housing related expenses.

Male respondents expected relatively higher inflation in one to three months, as well as one year ahead, as compared to the female respondents.

GDP: Real gross domestic product (GDP) is expected to grow by 6.8% in 2024-25 and 6.6% in 2025-26. Forecasters have assigned the highest probability to real GDP growth in the range 6.5-6.9% for both the years 2024-25 and 2025-26.

Annual growth in real private final consumption expenditure (PFCE) and real gross fixed capital formation (GFCF) for 2024-25 are expected at 6.2% and 7.9% (revised down), respectively. Real gross value added (GVA) growth projection has been revised down marginally to 6.7% for 2024-25 and kept unchanged at 6.4 per cent for 2025-26.

 Inflation: Annual headline inflation, based on consumer price index (CPI), is expected to be higher at 4.8% for FY25 and 4.3% for FY26.

External sector: Merchandise exports and imports are projected to grow at a slower rate of 2.4% and 4.6% respectively in FY25 and recover to 5.5% and 6% respectively in FY26, in US dollar terms. Current account deficit (CAD) is expected at 1.0% (of nominal GDP) during both FY25 and FY26.

India’s real GDP grew by 5.4% yoy during 2QFY25 (July-Sep); the slowest growth rate recorded since 3QFY23. The Reserve Bank of India had forecasted a growth of 7%, just a month ago, while the market consensus was less sanguine at ~6.5%.

For the argument’s sake, some of the slowdown in 2QFY25 could be attributed to a high base (2QFY24 GDP grew at 8.1%). However, it is tough to deny that the Indian economy has been growing below potential in most of the post global financial crisis (GFC-2009) period. In fact, it will not be totally perverse to argue that in the past one decade or so, the potential growth curve itself has moved lower.

For record, the Indian economy has grown at an average rate of 5.8% during the past decade (FY15-FY24). Even normalizing for the Covid-19 lockdown impact, the Indian economy has grown at an average rate of 6.0%, much below the estimated potential growth rate of over 8%. The real GDP had grown at an average rate of 7.8% during the preceding decade (FY05-FY14).

The slowdown in 2QFY25 has been led by the industrial sector, especially, manufacturing and core sector (e.g., mining and electricity) – a sector that has been the highest priority area for the incumbent government in the past decade. Agriculture (3.5% growth) sector did well on the back of a bountiful monsoon; and services also grew at a decent 7.1% led by public administration. On demand side, investments contracted for the fourth consecutive quarter, belying the promise of a massive jump in allocation for capex in the union budgets for FY24 and FY25. Private consumption grew 6% yoy on a low base of 2.6%, but declined qoq, despite the higher DBT.

The fiscal data for April-October 2024 period shows that contrary to its commitment in the union budget, the government has sacrificed capital expenditure in favor of direct cash transfer (DBT) to households. Ahead of key state elections, the government transferred an advance installment of tax devolution to states to meet revenue expense obligations. The central government capex (including on defense) was much lower than the budget targets. The disbursement of the promised capex loans to the states was also lower. Revenue expenditure on education, drinking water and sanitation were restrained to increase DBT allocation.

The popular narrative after the announcement of 2QFY25 GDP data appears to be that high effective rate of taxes and higher interest rates are hurting the growth and fiscal and monetary stimulus may lead to a course correction. I sincerely beg to differ from this hypothesis.

I have often highlighted that the obstacles to the acceleration in India’s growth rate are structural and not cyclical. Inability to adequately exploit our most valuable resources – the human capital and the largest pool of arable land in the world – is the principal reason for below potential growth. Consistent misallocation of capital, adhocism in policy making, lack of a conceptual growth framework, a distorted federal political structure, blatant pursuit of crony socialism, and lack of a long-term socio-economic growth plan.

In this context, it might be pertinent to note the OECD has projected a gradual deceleration in the potential growth rate of the Indian economy in the next four decades, as the marginal productivity of capital declines and contribution from technological progresses diminishes. (Table 1). The potential rate declines, even if in a blue-sky scenario, where India is able to take fuller advantage of its demography and is able to achieve a much higher rate of capital accumulation and employment (Table 2). (see full report here)

With the conclusion of the US elections, most of the noteworthy events for the current year 2024 are over. Though some traders may be looking forward to 23^rd November (Assembly election results), 6^th December (RBI’s MPC policy statement) and 18^th December (FOMC policy statement), these events are not expected to make any material change in the market sentiments.

·         In the absence of any foreseeable major event, the markets are in maintenance mode for the past couple of weeks.

·         Benchmark indices are consolidating in a narrow range, just keeping the day traders busy.

·         Broader markets are carrying out the process of clearance: the stocks that crossed the red line and strayed into bubble territory are being punished and dragged back to their right place.

·         The stocks that have been underperforming (or are likely to underperform) due to macro conditions, are being assigned lower weights and stocks performing (or likely to perform) strong are being promoted to top order.

·         Traders and investors who became greedy and traded beyond their financial capacity, are being taught some important lessons. They are learning how to balance the sentiments of greed and fear, manage risk and reign return expectations.

The current state of affairs of the Indian markets could be summarized as follows:

Nifty YTD2024: Decent performance, but lags alternatives

Indian stocks have delivered a decent performance YTD2024. The benchmark Nifty50 has gained over 11%; whereas Nifty500 (16.4%), Nifty Smallcap100 (21.1%) and Nifty Midcap100 (21.2%) have delivered much better returns. Media (-6%), FMCG (0.7%), Private Banks (+1.7%) are the sectors that have underperformed the benchmark indices. Pharma (33.6%), Auto (+26.5%), Realty (+25%) are some of the notable outperformers.

However, if we compare the YTD2024 returns yielded by Gilt funds (~10%) or Gold Funds (~20%), Nifty50 returns appear disappointing.

Globally, Nifty50 has been one of the best performing emerging market indices, though it lagged the major markets like the US (S&P 500 +26%), Japan (Nikkei +18%), China (+16%). Nifty50 outperformed Europe (STOXX600 7%), Indonesia (0.5%) Brazil (-3%), and South Korea (-5%), etc.

Foreign investors trim equity stakes to the lowest since GFC

Net YTD2024 FPI inflows in the Indian markets is over Rs one trillion. However, they have been net sellers in equities to the tune of Rs190.6bn.

What has bothered most of the market participants is the net selling in secondary equity markets to the tune of Rs 1.06 trn. Out of this Rs876bn worth of sale occurred in the month of October alone.

With this selling, FPIs have reduced their stake in Indian equities below 17%, from a high of over 20% in pre Covid period. The current stake of FPIs in the Indian equities is the lowest since the global financial crisis (2008-09).

 

Market breadth worsening

Despite the sharp outperformance of the broader market indices, overall market breadth has been dismal YTD2024. In particular, the breadth has been worsening consistently since June 2024.

 

Volumes shrinking

The level of activity in the Indian stock markets has declined in the recent months. The traded value and the quantity of shares traded have declined much below average. This may imply the participation of non-institutional investors/traders in the cash equity market has declined.

 

Market cap at 136% of GDP

The market capitalization of India crossed the US$5 trn mark in 2024. Presently, India market capitalization contributes ~4.25% of the global market capitalization, the highest ever level. For context, in the past two decades, on an average India’s share in the global market capitalization has been close to 2.5%. At the present level, India’s market capitalization is over 135% of the FY2025e GDP, against a 10 year average of 85%.

1HFY25 Earnings growth for Nifty50 companies has been one of the worst in several quarters. As per some brokerages, about two third of sectors are trading at a premium to their historical valuations.

Orderly weakening of USDINR, bonds stable

USDINR weakened 1.5% YDT2024 to its lowest ever level of Rs84.4/USD. The decline has been orderly and well managed. The INR resilience has been remarkable considering that the RBI has been accumulating USD and also buying Gold; CAD has started to worsen, inflation has been sticky and fiscal deficit has remained elevated.

The benchmark bond yields have also eased 6-7% YTD2024, in tandem with the global trends. The bond markets have been very stable and have not shown any sign of jitteriness during general elections, escalation in the Middle East Asia, and recent sharp rise in the US benchmark yields.

Overall, the markets appear stable with no sign of panic or turbulence. The ongoing corrective phase might last for a few more months and add to the inherent strength of the Indian markets, as the excesses of the past get erased and valuations normalize. 

After the conclusion of the recent Haryana Assembly elections, a lot of people, including some of the senior most political analysts & observers, wondered why the Congress party lost the election, contrary to the popular perception. The ruling party was witnessing serious anti-incumbency issues. The Congress party, being the principal opposition party, had raised all the pertinent issues concerning the common people. Congress leader Rahul Gandhi carried an effective campaign. Almost every poll projected a clear lead for the Congress Party.

At a gathering last evening someone asked me “how do you explain the repeated poor performance of the Congress Party, despite the rising popularity of its main leader?” My answer was simple, “Congress leaders are telling people what problems (inflation, unemployment, nepotism etc.) they are facing, as if people are not aware of their problems. Congress leaders, however, do not offer a solution for any of the peoples’ problems. That is why they lose elections.”

Yesterday, I ended my note highlighting a potential problem for investors (see here). Some readers suggested, “it would have been better if I offered some solutions also, lest it is a meaningless exercise”.

So, here are my two cents for augmenting the government fiscal balance. Of course, as usual, some of the readers may find these utopian. Notwithstanding, in my view these are practicable, effective, and worth sharing for generating a wider discussion.

Go back to villages

Since independence the government has focused on development of industrial and urban infrastructure in the country. It has actively participated in the endeavor through a large number of public sector enterprises; besides offering a myriad of tax and other concessions to the private entrepreneurs. Now, the country has a reasonably strong industrial base. Many of our industries are globally competitive. We have a strong set of entrepreneurs and risk takers. It is therefore high time when the government should reset its priorities and turn its primary focus on agriculture. To meet this end, the government may consider:

Exiting all industrial and banking activities and actively undertaking agricultural activities. It should develop barren lands; develop water bodies and irrigation facilities; develop and use technology for enhancing productivity; give employment to landless farmers; take risk with new technologies & crops; partner with marginal farmers in consolidating their land and do farming on that land - just the way it undertook industrial activities immediately after independence.

Undertake, on mission basis, the task to re-skill the underemployed farmers and farm labor. The farmers and their family members may be trained as dairy workers, domestic help, nurses, tourist guides, artisans, etc. Expecting the construction sector to absorb all surplus farm labor is a bad idea.

Develop at least 5 very large special agri export zones in rocky and desert areas of central and western India and undertake export of farm produce as a commercial activity. These zones may be developed in public, private or joint sectors. Besides, it may acquire farm assets, especially rice farms, overseas to reduce water intensity of Indian agriculture.

Encourage various states to make bilateral or multilateral agreements for procurement, processing and trading of farm produce and movement of labor within states.

Nationalize all rivers. Develop a national water grid. Set up a national water regulator, who shall work out a water sharing formula for all states and union territories every three year and maintain adequate provisions for managing droughts. The idea should be to ensure that not a drop of river water flows into sea from India. Develop a water distribution grid on the models of roads and power grids on a mission basis.

The aim should be to grow agriculture and allied sectors to become at least 40% of the economy. This only can assure sustainable employment for Indian youth, and orderly urbanization of India to promote services, (especially tourism) and rapid industrialization.

It has taken more than seven decades for Indian industries to reach a stage where the government may consider fully exiting the industrial activities. It may take 2-3 decades for Indian agriculture to reach a stage where the government will be able to exit farming activities completely. I am definitely not suggesting nationalization of the agriculture sector. I am just saying that the government should undertake the activity on a commercial basis to provide the sector with much needed escape velocity in terms of capital, technology, and risk-taking capability.

Pragmatic business regulation

The government must substantially liberalize rules and regulations governing businesses in India. It should make the regulatory pragmatic, allowing a great deal of freedom to businesses.

For example, an autonomous sustainability commission may be set up. The commission may comprise representatives of the scientific community, civil society, and judiciary. Instead of prescribing a rigid dogmatic environment clearance regime, each business must be permitted to submit a customized sustainability plan to the commission. The plan must specify how the enterprise proposes to address the sustainability concerns arising from its business. The commission may accordingly award environment clearance.

A pragmatic, business-oriented regulatory framework would stimulate growth, encourage larger CSR activities, generate more employment and hence ease pressure on fiscal.

 Rising participation of household (retail) investors in the Indian stock markets has been a topic of interest for the past couple of years. Most analysts and strategists have highlighted this as a key factor behind a sustained rise in the benchmark indices and low volatility, despite subdued foreign flows. Even the Prime Minister and many senior ministers made it a point in their campaign in the recently concluded general elections.

In particular, a consistent rise in household investments in the mutual funds through systematic investment plans (SIP - a popular method to automatically invest a predetermined amount at predetermined intervals) has been cited as a strong support for the Indian equities.

Most market participants are confident about this support to the Indian equity markets and its positive impact on the valuation, volatility and breadth of the market. I acknowledge the rise in the participation of household investors in equity markets. I am however not very confident about its sustainability and impact on the market performance. I would like to see more scientific evidence of growth in SIP and its impact on markets.

In this regard I find the following data points noteworthy.

·         The share of household savings in the gross national savings has been declining for the past many years. India’s gross savings rate stood at 29.7% of gross net disposable income (GNDI) in 2022-23, with households contributing 60.9% of aggregate savings against a ten year average of 63.7%.

·         The share of net financial savings in total household savings has seen a declining trend in the past decade. It stood at 28.5% in 2022-23, from an average of 39.8 per cent during 2013-2022.

·        Net financial savings of households have declined to 5.3% of GDP (FY23) from an average of 8% during the last decade (2013-2023).

·         The sharp rise in household financial savings during the pandemic (51.7% of total household savings in 2020-21) has been drawn down subsequently, as in many other economies, and shifted towards physical assets.

·        Bank deposits, provident fund and insurance continue to dominate the composition of household savings deployment. Post Pandemic there is some shift towards shares, debentures and mutual funds category, but it does not denote any change in the long term trend.

·        SIP flows have risen in the past few years. The rise has been quite remarkable in the post pandemic period. As per AMFI data, from Rs 43921 crores in FY17, SIP flow rose to Rs199219 crores in FY24.

·        However, if we see on a relative basis (as a percentage of market capitalization), SIP flows have not seen much growth in the post pandemic period. In fact, at the current run rate, FY25 SIP flows as a percentage of market capitalization would be almost the same as FY19.

 The Reserve Bank of India (RBI) recently released the results of forward-looking surveys. Based on the feedback received from the respondents the survey results provide important insights with respect to consumer confidence, inflationary expectations and economic growth expectations.

Consumer confidence

The survey collects current perceptions (vis-à-vis a year ago) and one year ahead expectations of households on general economic situation, employment scenario, overall price situation, own income and spending across 19 major cities.

As per the survey results, Consumer confidence for the current period paused on its uptrend as sentiments on all parameters, except spending. The current situation index (CSI)2 moderated to 97.1 in May 2024 from 98.5 two months ago. (A value below indicates a state of pessimism)

However, for the year ahead, consumer confidence remained at elevated level in the optimistic terrain though it declined, albeit marginally, due to relatively tempered sentiments on the general economic situation and employment prospects. The future expectations index (FEI) stood at 124.8 in May 2024 (125.2 in the previous survey round).

Consumers expect higher rise in overall spending over the next one year vis-à-vis the previous survey round; more respondents expect an increase in both essential and non-essential (discretionary) spending.

Household inflationary expectations

Households’ inflation expectations for the three months and one year ahead periods increased by 20 basis points (bps) and 10 bps, respectively, but remained in single digits; their perception on current inflation, however, moderated by 10 bps and stood at 8.0 per cent in the latest survey round.

Higher share of respondents expected prices and inflation to rise for all major product groups over the next three months as well as one-year periods

At the aggregate level, female respondents had marginally lower inflation assessment and expectations than their male counterparts. Among occupation categories, self-employed respondents group expected highest inflation.

For one year horizon, households’ expectations on general prices remained closely aligned with their assessment related to food prices and housing.

Forecast on macroeconomic indicators

GDP: Real gross domestic product (GDP) is expected to grow by 6.8 per cent in 2024-25, revised up by 10 basis points (bps) from the previous round. It is expected to grow by 6.7 per cent in 2025-26, revised up by 20 bps from March 2024 survey round.

Forecasters have assigned highest probability to real GDP growth in the range 6.5-6.9 per cent for both the years 2024-25 and 2025-26.

Annual growth in real private final consumption expenditure (PFCE) and real gross fixed capital formation (GFCF) for 2024-25 are expected at 6.0 per cent and 8.6 per cent, respectively. Real gross value added (GVA) growth projection has been revised up marginally to 6.6 per cent for 2024-25 and kept unchanged at 6.4 per cent for 2025-26.

Inflation: Annual headline inflation, based on consumer price index (CPI), is expected at 4.5 per cent for both the years 2024-25 and 2025-26.

External sector: Merchandise exports and imports are projected to grow by 3.9 per cent and 5.2 per cent, respectively, during 2024-25 and by 5.1 per cent and 6.0 per cent, respectively, during 2025-26, in US dollar terms. Current account deficit (CAD) is expected at 1.0 per cent (of GDP at current market prices) during 2024-25 and at 1.1 per cent during 2025-26.

 

 FY24 Real GDP growth surpassed all estimates, even the most optimistic once, by a wide margin – growing 8.2% in FY24. The forecasts for FY25 have been upgraded sharply higher. Now most professional forecasters are projecting FY25e GDP growth to be in the 6.7-7.2% range.

FY24 Real GDP growth has been led by investments (+9%). Consumption growth, both public (+2.5%) and private (+4%), continues to remain poor. The share of private consumption fell to 55.8%, lowest in decades. Exports (+2.6%) growth was also one of the lowest in a decade (excluding Covid affected FY20 and FY21).

On the supply side, FY24 witnessed one of the worst agricultural GVA growth (+1.4%) in a decade; whereas Industrial growth (+9.5%) led by manufacturing and construction, was extremely strong. Services growth slowed down to 7.6% from 10% in FY23.

In 4QFY24, the surprise came largely from exports (+8.1%). Government consumption (+0.9%) completely collapsed due to election related restrictions.

On the supply side, agriculture GVA (+0.6%) and Services GVA (6.7%) growth was below par. Industry GVA growth (8.4%) did much better. However, adjusted for base effect (4QFY23 Agricultural GVA growth 7.6% and Industrial GVA Growth 3.4%) things look better.

FY24 Nominal GDP growth came at 9.6% (FY23 14.2%). Nominal GDP (GDP at Current Prices) is estimated at ₹295.36 trillion, against ₹269.50 trillion in FY23.

Fiscal Balance: Given the higher nominal GDP than previous estimates and better tax collections, FY24RE for Fiscal deficit has been revised downward to 5.6% from previous estimate of 5.8%. In addition, Rs2.1 trillion transfer from the RBI has also helped the fiscal balance materially. It is, therefore, likely that FY25BE for fiscal deficit would also be revised lower from 5.1% presented in the interim budget.

A favorable fiscal balance, favorable monsoon, and visibility of tax buoyancy shall afford greater fiscal leverage to govt for capex and social programs.