Vijay Kumar Gaba: GDP

Showing posts with label GDP. Show all posts

Tuesday, July 4, 2023

1H2023 – So far so good!

The first half of the year 2023 has been good for risk assets. Despite strong headwinds in the form of aggressive rate hikes, banking sector turmoil, political & geopolitical events and credit warnings, the stock market made a steady move up with very low volatility. Another notable feature of the global market movement in 1H2023 was the stark underperformance of emerging market equities as compared to the developed markets – even though the development markets appeared to be facing serious growth challenges and financial sector stress. The emerging markets like India demonstrated much stronger economic resilience and price stability.

Equities and Crypto recorded strong gains in the first half of 2023; while commodities (especially energy), USD and bonds lost some ground. The rally in risk assets though lacks belief of investors, as underpinned by high cash levels.

Though at present equity markets appear strong on the back of a resilient demand environment, easing geopolitical conditions, controlled inflationary pressures and peaking interest rates – the uncertainty levels continue to remain elevated. The confidence in the economic growth in the developed world remains low, while valuations seem to be discounting a strong economic recovery. Consequently, the conviction in the present stock price levels is low.

India performance – 1H2023

Indian markets performed reasonably well in the first half of the year 2023. Though Indian equities underperformed the developed markets in line with the global trend, it did very well within the merging market universe. The key highlights of the India market performance could be listed as follows:

· The benchmark Nifty50 gained ~6% during 1H2023; while the Midcap (+13.5%) and Small Cap (+11.4%) did much better. Consequently, overall market breadth has been strong.

· The markets were negative for the first four months of the year. It rallied hard in the last two months (May-June) to recoup the losses and post strong gains. Considering this, the rally in broader markets has been furious but lacked larger participation.

· The total market capitalization of NSE is higher by 5%; much less than the gains in indices – implying that a significant section of the market may have actually lost significant value in the past six months.

· The number sector underperforming the benchmark indices outnumber the sector outperforming. The rally was counterintuitively led by the rate sensitive sectors like Realty and Auto; while energy and PSU banks were notable drags. Consumers (despite visible rural demand stress) and pharma also outperformed. IT Services and financials were other notable underperformers.

· Some Adani Group stocks, and Zee Entertainment etc were notable losers on corporate governance concerns; while some mid and small cap IT stocks were amongst the top performers for the period.

· The Capital Goods and Heavy Engineering sector has been flavor for the period. Particularly, the businesses catering to sectors like defense, railways, and road construction did extremely well.

· Indian equities have sharply underperformed the developed market and some emerging market peers like South Korea. However, it did better than BRICS peers and other emerging markets.

· Institutional flows to the secondary equity markets were positive for the all six months. 1H2023 witnessed a total flow of ~INR1562bn, with FPIs contributing over INR696bn. The correlation of institutional flows with Nifty returns however remained poor (~40%).

· The rates inched higher during 1H2023. Policy rates were higher by 60bps; while money market rates were higher on average by 70-75bps. Deposit rates did not see much change while lending rates were higher by upto 65-70bps.

· The overall Indian yield curve shifted lower; though at the lower end (upto 1yr residual maturity) it lifted sharply higher as RBI continued to withdraw accommodation.

· INR weakened against USD (-4%), EUR (-8.7%) and GBP (-9.1%) while it was marginally higher against JPY (+2.6%).

· The economic growth surprised on the higher side with the Indian economy recording a growth of 6.1% in 4QFY23. Overall for FY23 India’s GDP grew @7.3%, much better than the estimates.

· CPI inflation has inched closer to the lower bound of the RBI’s tolerance band of 4%-6% with May’23 CPI inflation number coming at 4.3%. The core inflation remained sticky at 5.4%.

· Corporate performance has shown resilience in recent quarters, with sales growth recovering and margins bottoming.

Tuesday, June 27, 2023

Nine years of continuity and low growth

Last month the incumbent NDA government completed nine years in power with BJP having full majority in the Lok Sabha on its own. In the 2014 general election, it was after three decades (post the landslide win of the Congress party led by Rajiv Gandhi in 1984) that a single party (BJP) had secured over half the seats in the Lok Sabha. Obviously, the people had great hopes from the new government that has won their confidence on the promises of a corruption free regime with equal opportunities (Sabka Saath Sabka Vikas).

For the 5years (2014-2019) the Indian economy (Real GDP) grew at a CAGR of ~7.4%, slightly better than the CAGR of ~7.1% during the previous five-year term (2009-2014). In 2019, the BJP returned to power with an even larger majority. During the first four years of the current term, the Indian economy has grown at a CAGR of 3.1%, the slowest pace of growth achieved by any government in the post liberalization (1991) era.

The best growth trajectory was seen during UPA-1 tenure when the economy managed to grow at a CAGR of 8.52% (2004-09). This was perhaps the outcome of massive reforms implemented by the preceding NDA-1 government (1998-2004); in which monopolies of the government over the core sectors like power, mobile telecom, coal, roads, oil & gas, airports, ports, etc. were divested. NDA-1 also implemented massive investment-oriented policy initiatives like SEZ, NHDP, PMGSY, Missile & GPS development, UMPP, NELP, etc. that led to accelerated investment and growth in the following decade.

The UPA government (2004-2014) earnestly took forward the reforms initiated by the NDA-1. It substantially liberalized the FDI regime; signed the Civil Nuclear Deal to usher a new era of strategic partnership with NATO & NSG; and introduced the first universal basic income scheme in the form of MNREGA and food security scheme in the form of National Food Security Act 2013.

Most important, it laid the foundation of complete digitization of the Indian economy in the ensuing decades by creating robust platforms like UIDAI (Aadhar) and NPCI (UPI, Fastag etc.); and laying an aggressive roadmap for financial inclusion in the budget speech of FY11 in accordance with the recommendation of the Rangarajan committee (2008).

The financial inclusion roadmap required banks to reach 73,000 rural habitations with a population of over 2000 by March 2012, using information and communication technology-based models and banking intermediaries (Business Correspondents). RuPay – an Indian domestic debit card, introduced on 26 March 2012 by the NPCI was a key landmark in this journey. Basic Savings Bank Deposit Account (BSBDA) along with BC proved extremely successful in increasing the total number of banking touch points from ~67k in FY10 to 586k in FY16 (RBI Annual Report FY17). (BSBDA was rechristened as Jan Dhan Yojna- PMJDY with enhancement of scope to include some other financial services within its ambit.)

The UPA government also introduced The Constitution (115th Amendment) Bill, 2011 to implement a common nationwide GST based on Ajit Kelkar committee (year 2000) recommendations; though the bill could not be passed due to opposition from other parties. The UPA government also introduced The Real Estate Regulatory Authority (RERA) Bill in August 2013. The bill was referred to the standing committee of the parliament, which submitted its report after considering public comments in February 2014. The Bill therefore could not be passed during UPA-2 tenure.

It could be argued that sub-optimal performance of the economy in the past four years is primarily due to the impact of Covid-19 pandemic that shutdown the economy for almost 6 months in 2020. In my view, however, the argument could be accepted only as partially valid. Most previous regimes had also witnessed massive disruptions and displacements like the financial sector crisis (failure of UTI, ICICI, IDBI, ICICI etc.); Asian currency crisis (1997), global economic sanctions post 1998 nuclear tests; dotcom burst; global financial crisis (2008-2010); energy inflation due to wars in the Middle East Asia; banking crisis due to collapse of infrastructure sector that was used to stimulate the economy since 1998 with numerous unsustainable projects; political instability (three election in three years 1996-1998); Kargil War; incoherent political alliances (especially UF, NDA-1, UPA-1) etc. Despite all this, most governments could achieve a higher growth rate than what we have seen in 2019-2023.

It is evident from the pace of highway construction, digitization of the economy, financial inclusion, and extension of universal basic income schemes, etc., that the incumbent government has pursued the programs and policies initiated by the previous governments and continued to build upon the platforms created by his predecessors. Schemes like PLI have also set ambitious targets; even though the results so far have not been encouraging.

However, we have not seen any transformative policy initiative that can lend the necessary velocity to the economy to catapult it into a higher orbit. There is little progress in the areas of agriculture reforms, disinvestment etc. Fiscal sustainability has remained compromised, as the debt burden has continued to increase. The private capex has mostly remained evasive due poor demand conditions and risk averseness of banks. Though the situation has shown marked improvement in the past 15-18months. The price situation has remained volatile, mostly governed by external factors like global prices of commodities and weather conditions. There is little evidence to show that the government and/or RBI have any plan in place to control the volatility in prices.

In my view, however, the worst aspect of the current regime has been the failure to ensure adequate employment, especially in the manufacturing sector. More on this tomorrow.

Thursday, May 25, 2023

Dr. Copper flashes red card

Three-month future price of copper at COMEX has corrected almost 27% ~US$3.61/lbs from US$4.95/lbs at the end of February 2022.

Moreover, the discount between spot prices three months future at LME widened to the largest since 2006, indicating poor outlook for copper demand in the near term.

Copper prices have fallen over 10% in the past one month alone on disappointing growth data from China. The hopes of a sharp recovery in Chinese growth in near term are fading as more downgrades are indicating. Goldman Sachs reportedly revised its average copper price forecast for 2023 by over 11% to US$8698/t from US$9750/t earlier. Though the optimism over Chinese growth and consequent firmness in copper prices is not lost completely. For example, Bank of America is still maintaining its US$10,000/t copper price forecast for 2023 end in the hope of large demand ramp up as China accelerates spending on its power grid. Nonetheless, the general mood is drifting towards accelerated slowdown in demand.

Since copper is used in infrastructure (power, shipping, buildings etc.) machinery and discretionary consumption (housing, vehicles, appliances etc.) its demand is widely accepted as a lead indicator of the direction of the economy. For its ability to provide a correct prognosis of the health of the economy, the bright metal is popularly known as Dr. Copper.

So, if the latest prognosis of global economy by Dr. Copper is correct—

· We shall see an accelerated slow-down in global economic activity with little support from China, in the next few months. This shall reflect in poor export demand for India also.

· The inflationary forces may weaken as tighter money constricts demand further; eventually leading to the next round of monetary easing by the end of 2023 or early 2024. RBI’s growth forecast for FY24 may also get moderated resulting in change in the present “withdrawal of accommodation” monetary stance.

· Deflation, rather than inflation, could again emerge as the major concern of global policy makers by the end of 2023. Japanese markets that have majorly outperformed the developed peers on easing deflationary pressure could again face pressures.

· Notwithstanding the Debt Ceiling tantrums and political rhetoric, for global investors bonds may emerge as preferred asset class in near term over equities.

· Overall, a foundation for a decent equity rally in India over 2024-25 could be laid in the next 6months.

(Inputs from Copper price slides as global demand drops sharply published in the Financial Times)

Wednesday, May 3, 2023

What did RBI achieve in one year of monetary tightening?

It’s almost a year since the Reserve Bank of India shifted the course of its monetary policy stance and embarked on the path of monetary tightening and withdrawal of accommodation to reign in runaway inflation. In the course of its journey in the past one year, RBI reversed the entire 250bps of rate cuts made during 2019-2020.

Besides hiking the policy repo rate, RBI also enforced correction in banking system liquidity to check the demand side pressures on inflation. The banking system liquidity that was running in excess of rupees eight trillion a year ago, has been completely neutralized.

Impact of monetary tightening

It is very difficult to assess the direct impact of the RBI’s monetary policy action and its consequences. Nonetheless, it is pertinent to note how various sub segments of the economy have moved in the past one year. This movement could have been caused by a variety of factors, RBI tightening being one of them.

Inflation

The Consumer Price Index Inflation (CPI) has eased from 7.04% (yoy) in May 2022 to 5.66% (yoy) in March 2023. After mostly staying above the RBI tolerance band of 4% to 6% for more than 15%, the latest inflation reading is within the band, though still closer to the upper bound. If we adjust it for high base effect, material easing in global commodity prices, and significant improvement in supply chains, in the past one year, the direct impact of RBI policy on demand side pressure may not be material. Besides, given the chances of a below par monsoon due to development of El Nino in the Pacific Ocean, the food inflation may spike again challenging the sustainability of the recent fall in CPI inflation.

Money supply and credit

In the past one-year broader money supply (M3) in India has grown at a higher pace than the trend seen in the past one decade; and currently stands at INR227.8trillion.

The commercial banks have not passed on the entire 250bps hike in the policy repo rate to the borrowers. On average lending rates have risen 130 to 150bps. It is pertinent to note that movement in lending rates in India is mostly not in tandem with the policy repo rates. Lenders were also slow in cutting the rates while RBI was in easing mode. Regardless, now since the RBI has already signaled a pause, the probability of material rise in lending rates from the current level is low; implying that the policy rates are more of a signaling tool rather than a driving force for the commercial rates. The commercial rates are more of a function of demand and supply.

In FY23, the overall bank credit grew from Rs118.9trillion to Rs136.8trn, registering a growth of 15%, highest since 2014. Though some moderation in credit growth has been seen in the past one quarter.

The fastest growing segments of the bank credit in the past one year have been personal loans (especially unsecured loans) and financing to NBFCs, (much of this could also be consumer financing related). This clearly suggests that higher rates may not have deterred the demand much.

Growth

There is little evidence to show that the tighter monetary policy of the RBI in the past one year may have directly impacted the economic growth materially. Nonetheless, the growth momentum has definitely slowed down and is not seen picking up from the present low levels in any significant manner over the next 12months. Though the RBI has forecasted FY24 real GDP to grow at 6.4%; most private forecasters estimate the growth to remain slightly below 6%. Declining global growth and poor weather conditions could be the two major factors in the lower trajectory of growth.

Yield curve

The benchmark 10yr bond yields in India are now at the same level as these were a year ago. The short to mid-term yields (30days to 5yr) have risen sharply in the past one year. In the past six month in particular, the overall yield curve has moved down noticeably, except in the 30days to 1yr timeframe where the yields are still higher. Apparently, the poor liquidity in the banking system has resulted in higher near term rates, without impacting the demand materially – more of a lose-lose situation.

To conclude, I would believe that the aggressive tightening by RBI in the past one year, was more of a reaction to the global trend, ostensibly to preempt the outflows and pressure on INR, rather than to stabilize prices and calibrate demand. Given that USDINR has weakened by over 7% in the past one year; and foreign investors have been net sellers in the past twelve months, it could be concluded that RBI would have been better pursuing an independent monetary policy commensurate with the assessment of local conditions and requirements.

I understand the “not for this, things could have been much worse” argument fully and will reply to that some other time.

Thursday, March 16, 2023

Beyond ‘statistics’

Recently, the growth in per capita GDP of India has been in the news. The government statistics claim that per capita income of India has almost doubled in the past nine years. This claim has generated intense discussion over the economic performance of the incumbent government; especially relative to the previous UPA government (2004-2014).

Without getting into a political argument and keeping the statistics aside for a while; I would like the popular debate to take the following into consideration:

· The last census of India was done in 2011. Therefore all “per capita” data points are using an estimated number of the population. There is a possibility that the actual number could be different from the estimates.

· In the past twelve years there have been significant changes in the socio-economic and demographic structure of the country. The youth population has increased materially. Millions of professionals (engineers, doctors, management & accounting professionals etc.) and other graduates have passed out of colleges and millions have dropped out of colleges. Not all of these are fully or partially employed.

Besides, demonetization of high value currency (2016), implementation of GST (2017), and Covid-19 pandemic (2020) accelerated the trends towards formalization the economy and digitalization of trade and commerce stressing millions of the micro and small businesses (mostly self-owned) and migrant laborers.

The rise in inequalities and dispersion of income and wealth must be factored while using “per capita” data to measure the welfare, quality of life and purchasing power of the bottom 75% of the population.

· Traditionally, the primary sources of data on the workforce and employment have been the (i) decennial population census and (ii) nationwide quinquennial surveys on employment and unemployment by the erstwhile NSSO under the Ministry of Statistics and Programme Implementation. The latest Census data is available for the year 2011. Similarly, the quinquennium NSSO data on employment and unemployment is available up to the year 2011–12 only.

From 2017-18 National Statistical Office (NSO) of MoSPI started publishing Periodic Labour Force Survey (PLFS). PLFS data is published annually for both rural and urban and the total population; and quarterly for the urban households.

For the purposes of PLFS, the Labour force includes persons aged 15-60yrs who were either working (or employed) or those available for work (or unemployed). Some persons in the labour force may be abstaining from work for various reasons. Subtracting that number from the labour force gives the number of actual workers. These workers are further categorised as persons who are engaged in any activity as self-employed or regular wage/salaried and casual labour. The difference between the labour force and the workforce gives the number of unemployed persons.

As per the latest data NSO PLFS available (FY21), India has a low labour force participation rate of 41.6%. The rate is lower for urban labour force (38.9%) vs Rural labour force (42.7%); and for female workers (25.1%) vs male workers (57.5%). In urban India the female labour participation rate is dismal 18.6% vs still poor but higher 27.7% for rural female workers.

Clearly, (i) the data availability and quality is of not very high quality; (ii) employment conditions cannot be termed as good; and (iii) India is wasting the demographic dividend.

· Unlike other developed economies, we could not create enough unskilled and semi-skilled jobs in the manufacturing and construction sector during the transition of economy from agrarian to industrial. In fact, unlike the US and Europe, we jumped from agriculture to services mostly skipping the industrial part. Now we are trying to fill the gap by encouraging manufacturing. However, the unfortunate part is that manufacturing is no longer labor intensive now. It is not feasible to transit a large number of unskilled or semi-skilled agriculture workers to industry or even construction. Consequently, there remains massive disguised unemployment in agriculture.

At the same time we do not have enough highly skilled people needed for globally competitive manufacturing. The corrective action to encourage manufacturing is thus not working well, at least so far.

The only feasible way to correct the occupational structure of the country is to focus on accelerated development of the agriculture sector and make the farm workers more productive.

Tuesday, March 14, 2023

Checking portfolio for monsoon worthiness

This is further to “No clouds on the horizon” posted last week.

I made a rudimentary assessment of the potential impact on the financial market, assuming the monsoon rains are inadequate and/or prolonged heat wave conditions persist over a large part of north and central India, as anticipated by the weather experts. In my view, investment strategy needs a tweak to make it ready for a hotter and drier summer.

Asset allocation

An inadequate monsoon would essentially mean (i) persisting higher food inflation; (ii) higher fiscal support to the rural sector; (iii) high food credit demand; and (iv) higher short term yields.

Raise some tactical cash

I shall therefore like to raise some tactical cash from my equity allocation and deploy it in short term or liquid funds. I however do not see any case for changing the strategic allocation at this point in time. A sharper than presently anticipated correction in equity prices will motivate me to increase my equity allocation to “overweight” from the present “standard”.

Sectoral impact

I am no expert in equity research or economics. I mostly manage my investment strategy by applying learnings from my travels; observation of behavioral patterns and public information about economic trends. From my experience of working with rural communities and traveling to hinterlands, I have observed some broad sectoral impact of a deficient monsoon. Few examples are listed below.

It is pertinent to note that inadequate monsoon usually does not mean a pan India drought. Hence, it is more likely that different regions (and regional players) experience a divergent impact of a deficient monsoon.

Farmers’ economic behaviour

In case of a deficient monsoon, farmers quickly adapt to “drought mode” – deferring discretionary spend, e.g., on marriages, jewelry, vehicle, pilgrimage etc. and changing to shorter cycle crops. In the past two decades a tendency is growing amongst farmers (especially the young ones) to defer paying their dues to government and lenders etc.

It is pertinent to note that as per the latest NSSO statistics over 50% agriculture households are indebted with an average outstanding debt of Rs74121. More critically, only 57.5% of loans taken by agriculture households are for agricultural purposes, the rest are for personal purposes.

Given that most of the rural population is now assured of free/highly subsidized food under various government schemes, the sustenance farming (growing for self-consumption) is gradually reducing. A substantial number of small and marginal farmers is moving to cash crops that have usually higher input cost. A crop failure thus causes more stress to small and marginal farmers as compared to a decade ago. The insurance coverage to these farmers is highly ineffective due to a variety of reasons; unclear land title being one of the major reasons.

Energy intensity of water

In case of deficient monsoon, the energy intensity of water rises materially, as farmers rely on exploitation of ground water. Though the use of solar power for ground water extraction has increased materially in the past few years; the reliance on the grid is still very high. If we add to this the increased household (mostly urban) demand for cooling, the demand for power usually rises significantly. The demand for diesel (and diesel genset) could also be higher to meet the additional load of water extraction.

Livestock

Livestock is worst affected due to rain deficiency. Poor winter rains have already created severe fodder shortages and rise in milk prices. The dairy and meat production could be further impacted by deficient rains – impacting the income of farmers and food inflation adversely.

Important to note that about 25% of agriculture GDP is contributed by livestock.

Labor migration

The demand supply equilibrium for farm labor usually shifts down during deficient monsoon seasons. The real wages could see a sharp decline. The labor migration towards non-agriculture jobs is also higher. The availability of unskilled labor for construction in particular rises materially.

Food transportation

Traditionally, deficient monsoon years used to witness significant rise in the quantity of food transported across the country as part of the drought relief work. However, given the fact that the public food distribution system is now adjusted to free food for almost 800 million people, the incremental food transportation may not be as significant as it used to be a decade ago. Nonetheless, there could be some additional food movement in case of a material divergence in spatial distribution of monsoon.

I would therefore consider the following in my overall investment plan:

Negative List

Farm input – agri chemical, fertilizers, seeds.

Rural consumption – jewelry, gold, footwear, alcohol, home upgrade, personal vehicles, etc.

Dairy, poultry and edible oil production

Cotton yarn

Close watch

Rural lending, especially microfinance

Farm equipment, especially tractors

Crop insurance

Construction

Water intensive industries like paper, alcohol

Sugar

Positive List

Short term bonds

Diesel genset

Air cooling appliances like Fans, Coolers, Air conditioners

Tuesday, February 21, 2023

Summers could be hotter this year

The Reserve Bank of India has increased the policy repo rate six times in the current financial year (FY23). It has continued to withdraw excess liquidity from the financial system through various means and has mostly maintained a hawkish demeanor, insofar as the policy outlook is concerned.

In spite of (i) aggressive rate hikes; (ii) withdrawal of excess liquidity from the system; (iii) sharp correction in global commodity prices (especially energy); (iv) restoration of supply chains that had got damaged during pandemic resulting in severe supply shortage of key raw materials and inputs; (vi) three consecutive normal monsoon seasons yielding bumper crops; and (vi) slow growth – CPI inflation has persisted above the RBI tolerance range of 4 to 6% and credit growth has accelerated and remained strong. Obviously there is a disconnect somewhere. Even one third of the members of the Monetary Policy Committee of the RBI do not agree with the policy stance of the RBI and have voted against rate hikes.

Personal loans and working capital demand driving credit growth

In a recent report rating agency CARE Ratings highlighted that “Credit growth has generally been trending upward throughout FY23 and remained robust in recent months even amid the significant rise in interest rates.” The report pointed that “Retail and NBFCs have been the key growth drivers for FY23. Besides, demand for capex too is expected to drive industry credit growth.” As per the agency, “Incremental credit growth has risen by 12.2% so far in FY23. In absolute terms, credit expanded by Rs.14.5 lakh crore from March 2022. The growth has been driven by continued and sustained retail credit demand, strong growth in NBFCs and inflation-induced working capital requirement”.

Personal loans, driven by housing and vehicle loans, continue to be one of the fastest growing segments of credit growth. Even in December 2022, “Personal loans grew by 20.2 per cent (y-o-y) in December 2022 from 14.9 per cent a year ago, largely driven by housing and vehicle loans.”

Banking system liquidity turns negative from a large surplus

The banking system liquidity has been quickly evaporating in FY23. From a large surplus a year ago, the banking system liquidity has turned negative in recent weeks. As of January 27, 2023, the banking system liquidity deficit stood at Rs.18,916 crore as against a surplus of Rs.6.4 lakh crore at the beginning of FY23.

Credit growth outpacing deposits

For the fortnight ended January 27, 2023, deposits with scheduled commercial banks (SCBs) stood at Rs177.2trn. The current deposit base is higher by Rs12.5trn as compared to the beginning of FY23. Bank deposits growth continues to lag the credit growth resulting in gradual rise in credit to deposit ratio.

Conclusion

From a plain reading of the above mentioned data points and corroborating evidence, I am drawing the following conclusions:

· The economic growth continues to be highly skewed (K shaped)

The top decile of the population seems to have emerged economically stronger from the pandemic. Record high spend on foreign travel; record sales of high end cars; 9yr high sales of premium homes; are just a few indicators of this trend.

On the other hand, the middle classes have struggled to sustain their pre-pandemic lifestyle. Their savings are depleting; credit card outstanding and rolling credit is rising; and high inflation is hitting their consumption.

The reliance of poor people for essentials like food, shelter, healthcare, education on government is intensifying. Over 800million people are now availing free food.

· Rates could rise further

Persistent inflation, neutral to negative liquidity, high current account deficit (INR under pressure), slowing household savings rate, and credit demand outpacing the deposits imply that the overall environment for rates remains bullish. We may see deposit and lending rates rising further; while the policy rates stay elevated. A pause by RBI may not result in lowering of rates in the short term.

· Growth to remain suboptimal, private capex may remain in slow lane

There is evidence that high real rates may have started to constrict economic growth in India. The real GDP growth in FY24 is forecasted to be 5.8% to 6% by most economists and analysts, though RBI has projected an optimistic 6.4% in its latest monetary policy statement. Private capex may thus remain in the slow lane despite optimistic projections.

· Banks’ margins may take a hit

In the past one year Indian banks have enjoyed strong margins as loans were repriced in tandem with the policy rates. The deposit rates usually get repriced with a lag. We shall see deposit rates rising in the next few quarters impacting the margins of the banks.

· Economic inequalities may rise further

With inflation, high rates, slower economic growth (poor employment generation) continuing to hit the middle classes and poor hard, we shall see the economic inequality continuing to rise further. The consumption of the premium segment may sustain and grow faster as compared to staples and essentials.

Tuesday, January 31, 2023

Budget 2023: No negative would be the best positive

The union budget presented on 1^st February 2022 was widely hailed as growth supportive. Almost all experts and commentators opined that ~14.5% in budget capex would catalyze a new wave of infrastructure and industrial development and growth in the country. The finance minister highlighted the following four pillars of growth as the basis of her budget proposals.

1. Accelerated development of world class infrastructure (PM Gati Shakti)

2. Using digital capabilities for delivering inclusive development

3. Productivity Enhancement & Investment, Sunrise Opportunities, Energy Transition, and Climate Action

4. Crowding in private investment through enabling policy environment

Most strategists projected high growth for the infrastructure and capital goods sectors in the wake of great emphasis placed on capex by the finance minister.

However, collective wisdom of the markets did not concur with the enthusiasm of the finance minister and a majority of experts, as the funds allocations in the budget did not match the promise. The benchmark Nifty50 corrected over 5% in the five weeks following the presentation of the budget.

After one year, on the eve of another budget, the benchmark Nifty is almost the same level as it was a year ago. The promise of high growth made in the budget has been belied. Industrial growth (especially manufacturing growth) has collapsed in FY23. The latest NSO estimates peg FY23e industrial growth at 4.1% and manufacturing growth at a dismal 1.6%. Construction sector has also witnessed deceleration. Investment (Gross fixed capital formation) growth has declined to 11.5%.

In recent months some signs have emerged that indicate that the much awaited capex cycle might be just beginning to materialize and we might see some tangible outcome in the next couple of years. The budget for FY24 is therefore important in the sense that nothing is proposed in the budget which negatively impacts the nascent capex recovery in the private sector (also see Time for delivery is nearing). However, given the fiscal, economic and political constraints I shall not be expecting any material positives from the budget.

Some key highlights of the market performance since 2022 budget presentations are as follows:

· Benchmark Nifty (1%) is almost unchanged since the last budget.

· Small cap (-17%) have underperformed majorly. Midcap )-0.5%) have been almost unchanged since the last budget.

· PSU Bank (~28%), FMCG (~21%), Metals (~16%) and Auto (~11%) have been the top outperforming sectors.

· Media (-17%), Realty (-16%), IT Services (-14%) and Energy (-7%) have been the top underperforming sectors.

· Infra (-1%) and Services (-3%) did not do much in the past one year.

Thursday, September 8, 2022

5th largest economy

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.