Do it yourself

The present state of the Indian economy is characterized by the rising incidence of unemployment, disguised unemployment, and underemployment; higher than acceptable socio-economic inequality; strong and rising intellectual and skill inequality; gradually bridging but still high regional imbalances; low productivity especially in the agriculture sector; oversized government with abysmal level of decentralization; incapacitating supply constraints, especially in social and physical infrastructure terms; and trust deficit at all levels. A younger demography provides high potential in terms of growing workforce and consumption demand. However, the potential remains under-exploited due to low skill levels, lack of adequate employment opportunities, financial and social exclusion, and disillusionment of youth due to political indifference and poor governance standards.

I suggest the following 15-point program for overcoming many of these problems and exploiting the tremendous potential of the Indian economy that has been widely recognized. I shall discuss these points in some detail in the coming days.

1.      Take convincing measures to bridge the trust deficit between society and public institutions.

2.      Overhaul the education system to make it job-oriented. Inculcate enterprising skills in students from the primary level.

Emphasize developing traits like discipline, social responsibility, empathy, cleanliness, sustainability, tolerance, etc., at the primary level.

Transform RTE into the “Right to equal and uniform education”.

Skill youth in modern and evolving technologies on top priority.

3.      Promote cooperation movement in industry.

Allow employees’ cooperatives to buy a controlling stake in PSEs.

4.      Enhance agri-productivity to the highest level.

Promote collective and commercial farming.

Take factories to farms.

5.      Make at least 5 global education clusters by creating special zones.

6.      Develop at least one truly world-class tourism center in each state on the PPP model, with the local population being one of the partners.

7.      Stop river waters from flowing into the sea.

8.      Give equity in natural resources to the local population.

9.      Minimize the size of the government.

Devolve full powers to Panchayati Raj Institutions and local bodies.

Empower and encourage local communities to self-regulate and self-govern.

10.   Completely overhaul the police force and justice delivery system.

11.   Reorient public services to treat every citizen as a valuable customer.

Ensure the dignity of all citizens in birth, education, marriage, and death.

Transform public works departments and civic authorities. Reorient the civic work to care for public safety, convenience, sensitivities, and impact.

Make people’s lives easy.

Abolish toll on urban roads. Consider abolishing toll on all highways that are less than 6 lanes.

12.   Make public offices unremunerative by stripping most discretion.

Obliterate the feudal character of public representatives and bureaucrats and make them truly public servants.

13.   Implement electoral reforms. Consider state funding of elections. Afford equal opportunity to all citizens in public representation.

14.   Settle border disputes with neighbors and enter into a new era of cooperation and coexistence.

15.   Make winning multiple Nobel prizes in science and medicine a mission.

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.

Mitesh Gupta, an average student, passed senior school in 2021. He failed to pass the admission test for graduate school. He joined a distance learning course in 2022 but did not like it. His father retired from a mid-level government job in early 2023. He convinced his father to give him Rs two million from his retirement corpus and started trading stocks and derivatives. He learned a few things from YouTube videos, blogs, and social media posts. He has lost more than half of his initial capital in the past year but is hopeful to recover all lost money and make a decent living out of this occupation.

Arvind Agarwal runs a small packaging material manufacturing unit. His business had not been growing for the past few years, especially after the implementation of GST. He advised his 29-year-old son Anuj, a commerce graduate, to learn and start trading stocks as a side business. Anuj is learning stock trading from his friends, social media, and blog posts. He has also taken some online classes for technical analysis, and option strategies, etc. Anuj now remains glued to his laptop from 9 AM to 3:30 PM. In the past three years, he has been able to earn 18% CAGR on the capital employed in stock trading.

Neha Arora, a software developer, works as a mid-level manager with a top IT Services company in India. Her salary has grown at a CAGR of 8% over the past five years, much less than her household expenses. She started trading stocks during the Covid-19 lock-down while working from home. So far, she has been able to supplement her salary with the trading income. Neha plans to increase the capital deployed for trading and make it her full-time profession in the next three to four years.

Evidently, in the past four years, stock and derivative trading has become a full-time profession of choice for a variety of individuals. Incidentally, it is not an India-specific phenomenon. Similar trends are being reported from countries (developed and developing) across the world.

We have already reached a situation where a handful of people are innovating, creating businesses, and building wealth; whereas an exponentially higher number of people are just piling on their success, and trading their ideas, success, failures, business cycles, and performance with little or no sense of commitment to their business. Cynically speaking, a part of society is becoming like the plot of the much-acclaimed 2019 South Korean movie ‘Parasite’.

The question is “Is stock trading as a full-time profession" sustainable if a much larger number of individuals make it their profession of choice?”

I shall try to find an answer to this inquisition over the next few months. There are strong arguments on both sides. For example, —

·         Many traders quote the traditional market saying, “Owners of businesses make more money than the managers of the business”. This implies that passive shareholders of a company shall earn more than the people who are managing the business. The problem in this argument however is that not many traders are interested in becoming owners of businesses. They are happy buying and selling stocks for immediate 3-5% gains.

·         There is an argument that stock trading is a perennial business. It continues even during wars, natural calamities, and pandemics. There is no business like this. This argument comes mostly from young traders in their 20s and early 30s. They have not seen a three-decade stagnation in the Japanese market; over a decade of stagnation in the US and the UK markets, and frequent disruptions and stagnation in the Indian markets during the 1990s.

·         The strongest argument in favor of stock trading is that in this profession anyone can get significant leverage easily. Thus, the opportunity to multiply the capital is the best in this activity. The easy leverage part is true. But it works as a double-edged sword. The probability of losing the entire capital rather swiftly is also the highest in this profession.

·         The ability to earn above normal return depends on a combination of capital base, risk appetite, and skill set of the trader. This could be different for all traders. Traders with a small capital base, poor risk appetite and/or inadequate skill set are most likely to underperform the others, just like any other business or profession.

·         The sustainability of stock trading as a regular profession would depend on a continuous supply of quality businesses that employ new ideas (product, process, or service) and innovative techniques. If new quality businesses are not continuously added to the existing inventory of stocks available for trading, a serious demand-supply mismatch may occur in the market – driving the stock prices into the realm of irrational and exorbitant. That would make the entire stock market prone to sudden crashes, imperiling the overall economic growth of the country. So, to sustain so many new traders in the stock markets, we would need a matching number of entrepreneurs successfully seeding & cultivating new ideas, and providing adequate inventory for traders to pursue their activities.

·         If stock trading becomes a medium of livelihood for millions of youth, the entire regulatory framework may need to be overhauled. A massive paradigm shift may be needed to redefine the way stock trading is presently perceived by policymakers, regulators, and society in general. For example, RBI considers it an undesirable activity and imposes a plethora of restrictions for credit to stock traders. This activity is taxed heavily, instead of getting the usual “job-oriented” activity incentives. SEBI and Finance ministers have openly spoken against the popularity of option trading as a regular activity. The regulations do not provide any protection to regular traders.

In my view, the most notable part of the FOMC discussion was the mention of a scenario that may warrant further tightening of policy. Though the participants may not have specifically mentioned the term “Rate Hike” it was very close. The minutes read, “Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.” This is perhaps the first time in the past six months that FOMC participants have explicitly mentioned the likelihood of policy tightening.

The FOMC participants noted that data indicated continued strong economic growth. They, therefore, sounded circumspect about the restrictiveness of the current policy stance. They noted some progress on the inflation front, but found the data pointing “to inflation being more persistent than previously expected and to a generally resilient economy”.

The participants noted that the market expectations from the policy has shifted materially in response to the resilient economic growth and persistent inflation. “The policy rate path derived from futures prices implied fewer than two 25 basis point rate cuts by yearend. The modal path based on options prices was quite flat, suggesting at most one such rate cut in 2024.”

Some of the notable points in the FOMC minutes could be listed as follows:

·         Model estimates suggested that inflation expectations rose some, but mostly at shorter horizons. Longer-term inflation expectations appeared to remain well anchored. The possibility that geopolitical events could generate commodity price increases, pose an upside risk to inflation. It would take longer than previously anticipated to gain greater confidence that inflation was moving sustainably toward 2 percent.

·         The recent monthly data has shown significant increases in components of both goods and services price inflation. The disinflation process would likely take longer than previously thought. Increased efficiencies and technological innovations could raise productivity growth on a sustained basis, which might allow the economy to grow faster without raising inflation

·         The dollar strengthened as several foreign central banks were expected to start easing policy before the Federal Reserve.

·         The valuations across a range of markets appeared high relative to risk-adjusted cash flows. The assessment of vulnerabilities in asset valuations is raised to elevated.

·         Labor demand and supply continued to move into better balance, though the speed of this realignment appeared to have slowed in recent months.

·         Foreign GDP growth is estimated to have picked up in the first quarter from its subdued pace in the previous quarter. In Europe, economic activity resumed expanding following modest contractions in several economies amid monetary policy restraint and the repercussions of the 2022 energy shock. Growth stepped up in China, led by strong exports, but property-sector indicators remained weak. Elsewhere in emerging Asia, exports rebounded further from last year’s lows, lifted by robust global demand for high-tech goods.

·         The risks around the forecast for economic activity were seen as skewed to the downside on the grounds that more-persistent inflation could result in tighter financial conditions than in the staff’s baseline projection; in addition, deteriorating household financial positions, especially for lower-income households, might prove to be a larger drag on activity than the staff anticipated.

·         A range of risks are emanating from the banking sector, including unrealized losses on assets resulting from the rise in longer-term yields, high CRE exposure, significant reliance by some banks on uninsured deposits, cyber threats, or increased financial interconnections among banks.

·         Although monetary policy is seen restrictive, many participants were uncertaint about the degree of restrictiveness. They saw this uncertainty as coming from the possibility that high interest rates may be having smaller effects than in the past, that longer-run equilibrium interest rates may be higher than previously thought, or that the level of potential output may be lower than estimated.

My impression from the FOMC discussions is that even though the ‘Rate Hike’ is not mentioned in the minutes; it is clear that the status quo might last longer than anticipated (higher for longer). There is a fair degree of uncertainty over the Fed's next move. Presently the market is forecasting a 25-50 bps cut in the Fed’s target range for bank rate, a 25bps hike in the next 12 months cannot be completely ruled out.

Once the elections are over and the contours of the new government are clear in the first fortnight of June, the focus will shift to the presentation of a full budget for the current financial year. To keep the tradition, only an interim budget (vote on account) for FY25 was presented in February 2024 to run the government till a new government is formed for the next five years. A final budget is expected to be presented by the new government in the last week of July 2024.

Some media commentators and market experts have attempted to sketch the final budget based on the election speeches and media reporting of the party’s manifestos. Fears have been expressed that in the event of a non-BJP government assuming power at the center, the pace and direction of economic growth and development may slow down as resources are diverted to fulfill the populist agenda of opposition parties. In a non-BJP regime, the budget allocation for capital expenditure and infrastructure development may diminish materially.

I find that this narrative suffers excessively from an intrinsic fear of change. I could not find anything in the manifestos of opposition parties, mainly Congress, that would suggest any change in the focus on infrastructure development and faster economic growth. Most social welfare schemes promised in the manifesto aim to reduce poverty and achieve equitable growth. Almost all these schemes are in vogue in many states and at the central level. A set of similar schemes is also promised in the BJP manifesto also.

Technically speaking, market participants should rejoice the Congress manifesto, as it promises a much larger amount of cash in the hands of consumers. This could help put the missing piece of Indian growth, viz., consumption, in place. Provisions like statutory guarantee for MSP can also boost the farm input sector. Consumers and Chemicals are two major underperforming sectors of the market.

Besides, if a non-BJP government assumes power at the center, the market participants may again begin to speculate about tax exemption for the LTCG and dividends, etc. On the other hand, several BJP leaders and think tank members have spoken about the need for estate duty (inheritance tax) in the recent past. This has been a fear factor in pre-budget analysis since 2017. The finance ministers have defended LTCG taxation and dividend tax. In the past 10 years, effective personal taxation rates have remained high and the proposed Direct Tax Code is expected to remove more exemptions.

Insofar as fiscal profligacy is concerned, there is no evidence that the UPA government (2004-2014) indulged in fiscal indiscipline during their regime. Center’s fiscal deficit did jump from 2.54% in FY06 to 6.46% in FY09 due to the stimulus necessitated by the global financial crisis. However, it was gradually brought down to below 4% by FY15. This was despite welfare schemes like MNREGA, fuel subsidies, etc. Similarly, during the NDA regime, the center’s fiscal deficit jumped to 9.17% in FY20 and has been on the mend since then. This is despite the implementation of Food Security, cash payout to farmers, and many other welfare schemes.

There is no empirical evidence to support the fears of fiscal indiscipline by a non-BJP government.

I find that most schemes and programs promised by NDA and opposition INDIA groups would be implemented, if at all, gradually and mostly by merging and optimizing existing schemes at the state and center levels. The fiscal burden will come only incrementally with the equivalent or higher rise in nominal GDP. The fear of likely fiscal slippages may therefore be unfounded.

Logically, the analysts should be looking forward to a stock market rally in the short term if a non-BJP government is formed at the center. Though, it may not actually happen. We may see a knee-jerk reaction down and then a recovery, after the full budget is presented in July.

In case of a BJP victory, we may see a euphoric move up and then a corrective move down as the budget may not enthuse the market participants and earnings fail to justify some lofty valuations.

In either case, after July 2024, the markets shall be guided by the earnings, macro conditions, and global developments, rather than the outcome of elections.

So to answer What if? – I would say Nothing, just chill.

Also read

What if? - Part 1

What if? - Part 2

What if? - Part 3