Do it yourself

 The final budget presented by the finance minister has shaken the market cart, and added material uncertainty to policy making. The efforts to minimize uncertainty after demonetization have thus been negated to some extent.

As has been the practice in the past few years, the budget speech of the finance minister materially diverges from the actual budgetary provisions. By changing the capital gain tax regime and mentioning that they are working on a new Income tax law, they have forced the stakeholders to build-in a higher degree of policy uncertainty and unmindful regulatory provisions in their business and investment plans. Claiming simplification while introducing new complications (e.g., more transactions under TDS/TCS) has been a hallmark of the taxation policy in recent years. Use of technology is invariably claimed as an achievement, as if there is an option.

The level of uncertainty could be gauged from the fact that the priorities outlined in this budget are materially different from the interim budget presented just five months ago

Regardless, there are some positive take away from this budget that need to be commended.

Positive take away

Land reforms including digitization of land records got prominent mention in the finance minister’s speech. The minister mentioned that “Land-related reforms and actions, both in rural and urban areas, will cover (1) land administration, planning and management, and (2) urban planning, usage and building bylaws. These will be incentivized for completion within the next 3 years through appropriate fiscal support.” Linking central assistance to lower stamp duty could be a material impetus to urban development.

Fiscal consolidation. The finance minister refrained from splurging the extra resources generated through higher dividend from RBI &, PSUs, and additional tax revenue. She utilized it to bring the fiscal deficit down to 4.9% (vs 5.1% in the interim budget). Even the new development projects announced for the key coalition partners (JDU of Bihar and TDP of Andhra Pradesh) are proposed to be funded by the loans from the multilateral agencies like World Bank etc., where the Central Government might provide guarantee. The commitment to bring the public debt on a declining path from next year is also commendable.

Savings for children. Allowing pension accounts for minor children is a positive step for developing the social security framework. Retirement planning from birth should benefit a large number of savers in participating in the golden age of Indian financial markets and accumulating a decent retirement corpus.

Abolition of Angel-Tax. Angel tax is levied on the capital raised via the issue of shares by unlisted companies from an Indian investor if the share price of issued shares is seen in excess of the fair market value of the company. The excess realization is considered as income of the company and is taxed accordingly. The finance minister has proposed to abolish this tax (Section 56 (2)). This is a welcome step as it has been causing hardship to innovators.

Rental housing for industrial workers. The finance minister proposed, “Rental housing with dormitory type accommodation for industrial workers will be facilitated in PPP mode with VGF support and commitment from anchor industries.” This scheme if implemented properly can be a major reform in labor migration, urban planning and ease of living for poor laborers.

Issues that need deeper scrutiny

Forcing private capex: The Economic Survey highlighted that the private sector has not adequately responded to the incentives for capex. It seems the government now intends to force the private enterprises to invest more money in building capacity and generating employment. The budget adopts a carrot and stick approach for that. On one hand, it provides support for hiring more fresher employees and skill them, and on the other hand it makes outflow of funds from companies difficult. After dividends, now buybacks are also made tax inefficient. The idea seems to “encourage” companies to invest in growing their businesses and reward shareholders through share price appreciation only.

New income tax law. The Direct Tax Code had been hanging on the taxpayers’ head for almost two decades. It was shelved a few years ago. However, the finance minister has revived the proposal adding uncertainty about the tax provisions.

Backdoor entry of Estate duty. The changes in the capital gain tax regime give an impression that the government is testing the introduction of a wealth transfer scheme (Estate Duty) in future. The effective capital gain tax on legacy assets (Large Real Estate, legacy precious metals, jewelry etc.) has been increased by taking away the indexation benefit. It is to be seen whether this effort is widened and deepened in the coming years.

Taxation of bonds. The tax on gains made on sale of unlisted bonds has been enhanced to the marginal rate of taxation. This brings bonds at par with bank fixed deposits. This is in tandem with the concerns expressed by the RBI on money being diverted away from bank deposits. On the positive side, this may provide impetus to development of retail debt market by encouraging companies to list their bonds.

Gold and financialization of the economy. Ever since the government embarked on the path of economic reform and liberalization in 1991, the emphasis of policy has been to achieve higher degree of the financialization of the Indian economy. Low level of financialization of economy has in fact been sold as an USP of Indian markets, for it offered huge growth potential. Lamenting higher degree of financialization of the Indian economy in the Economic Survey, raising effective tax on bonds and bringing duty of gold lower contradict this concept.

New rum in old bottles. The finance minister has presented many ideas as path breaking, while these are already running schemes and execution has been below par. For example, rural roads, mission for pulses and oilseeds, organic farming, horticulture, blue economy (shrimp etc.), Employment incentive and support for MSME (introduced during Covid), Skill India, Industrial Parks, etc.

Protection to local manufacturing cut. The finance minister has cut basic custom duty on mobile phone, mobile PCBA and mobile charger to 15 per cent, reducing protection for the local manufacturers. This should be kept in mind by the analysts who are assuming status quo on policy for many EMS players for decades while making earnings forecasts.

Union Budget 2004-25

The following are the key highlights of the final Union Budget for FY25

Budget priorities

1)    Productivity and resilience in Agriculture

2)    Employment & Skilling

3)    Inclusive Human Resource Development and Social Justice

4)    Manufacturing & Services

5)    Urban Development

6)    Energy Security

7)    Infrastructure

8)    Innovation, Research & Development and

9)    Next Generation Reforms

Key direct tax proposals

Corporate/firms Tax

·         For foreign companies the rate of tax reduced from 40% to 35%, on income other than income chargeable at special rates, specified in respective sections of Chapter XII of the Act.

·         Deduction under section 36(1)(iva) in respect of contribution to pension fund approved u/s 80CCD increased to 14% of salary from earlier 10% of salary, provided the employee concerned has chosen the new tax scheme.

·         Section 56(2)(viib) imposing Angel tax on companies is proposed to be abolished.

·         Payments to partners by way of salary, remuneration, commission, bonus and interest etc. to be liable for 10% TDS.

Personal taxation

·         Amount of standard deduction on salary income increased to Rs75000 from the present Rs50000 for assessees filing return under the new tax scheme. For family pension standard deduction under new scheme will be Rs25000 instead of Rs15000.

·         Any Tax Collected at Source from an employee to be adjusted in computation of TDS by the employer.

·         Tax collected at source for a minor can be claimed by the parent if the income of such minor is clubbed with such parent.

·         The entire amount received from tendering of share under a buy back will be taxed as dividend income. The cost of acquisition of shares can be claimed as capital loss that can be set off against capital gains as per the prevailing rules of set off. (applicable from 1 October 2024)

·         Rent from house property cannot be shown as business income. It must be shown separately under the head income from house property and taxed accordingly.

Rationalization of capital gains tax (applicable from 23^rd July 2024)

·         Holding periods for various assets reduced to two – 12 and 24months from the present three –12, 24 and 36 months.

·         Assets divided into three categories – Listed financial securities, Equity MFs & Business trust (e.g., REITS), and other assets. Listed financial securities, Equity MF and Business Trust held for less than 12 months shall be short term assets and otherwise long term. All other assets to be long term if held for more than 24 months.

·         Listed financial securities (STT paid), Equity MFs and Business Trust – STCG Tax would be 20%.

·         LTCG Tax for all other assets would be 12.5% without any indexation benefit. LTCG of upto Rs1,25,000 exempted from tax for Listed financial securities (STT paid), Equity MFs and Business Trust.

·         STCG Tax on all other assets would be the marginal rate of taxation.

·         Unlisted bonds, debentures to be taxed at the marginal rate.

·         Capital gain tax rates to be same for both Resident and Non-Resident assessees.

·         Gift of assets by assessees other than individual and HUF to be fully taxable.

Rationalization of TDS

·         Sale of more goods with sale price exceeding Rs10 lacs to be made liable to TCS.

·         Rs 50 lac limit for TCS on sale of property to be considered as total sale consideration and not the consideration per buyer, where there are multiple buyers.

STT rates

·         It is proposed to increase the said rates of securities transaction tax on sale of an option in securities from 0.0625% to 0.1% of the option premium, and on sale of a futures in securities from 0.0125 per cent to 0.02 per cent of the price at which such “futures” are traded.

Others

·         Notice u/s 148 for reassessment can be issued only upto three years where income suspected to have escaped assessment is less than Rs50 lacs. In other case time limit would be six years.

·         Provisions for registration of charitable organization u/s 10(23C) and u/s 11 to 13 found overlapping. Accordingly, it is proposed to make section 11 to 13 the operational sections. Section 10(23C) will be used for transitory provisions only. The timeline for application for eligibility u/s 80G also rationalized.

·         New Vivaad se Vishwas 2024 Scheme to be launched.

·         Moveable foreign assets worth less than Rs20 lacs not to attract provisions of section 42 and 43 of Black Money Act. 

Key Budget features

Some key budget statistics

 When the Finance Minister Ms. Nirmala Sitharaman rises to present the final Union Budget for the fiscal year 2024-25 today at 11 AM, she will be creating a unique record. She will become the first finance minister of India to present six consecutive union budgets (2019-2024, in addition to an interim budget presented in February 2024. Prior to this, the record was held by the former prime minister Morarji Desai, who presented five consecutive union budgets (1959-1963). He had presented two interim budgets (1962 and 1967) also.

Ms. Sitharaman’s record is impressive, in my view, because she has survived the worst economic slowdown and fiscal slippage (FY21 GDP Growth -5.8% and Fiscal deficit of 9.17% of GDP) in the history of Independent India caused by the worst pandemic since 1917 Spanish Flu; a below par election performance of her party in 2024 general elections, apparently due to sub-optimal performance on inflation and employment generation fronts; sharp criticism on GST management from businesses and states; rumors of lack of support from her own party members and family; and persistent calls for her removal from the market participants.

Now coming to the budget to be presented today.

In the post liberalization (1991) days, budget presentations used to be an event of interest to a large section of urban India (Rural India did not have much TV in those days).

Changes in excise duty rates had immediate impact on businesses and household budgets. Introduction of new trains and changes in train fares affected a large number of people. Tax rates were consistently reduced; tax slabs rationalized; tax incentives on investments and savings increased; and basic exemptions increased resulting in many taxpayers getting out of the tax net or their tax liability lowered.

A large number of changes in tax laws would keep students (CA, CS, LLB etc.) also hooked to the budget. Many people would fill fuel tanks of their vehicles to make some savings on likely higher fuel prices, and buy one month of liquor and cigarette stocks a day before the budget presentation.

But nowadays nothing of this sort happens.

Goods and Services Tax and excise duty is now not part of the finance bill. Most of it is managed by the GST Council; through notifications issued from time to time, or by the respective state budgets. New trains are not announced in the budget and fares hikes are also announced outside the budget. Income tax rates have mostly stabilized. Only minor changes in the return filing and assessment procedures are announced in annual budgets.

Presently, the emphasis of the government is on bringing more people into the tax net and increasing the effective tax rates. In the past decade Tax Collection at Source (TCS) for a variety of transactions has been implemented. A variety of cess have been imposed to augment the tax collection. Incentives on investment and savings are being withdrawn gradually.

The budget documents are more like colorful corporate presentations. These omit much more information than these include. The budget speeches sound like the election manifesto of the ruling party. The finance ministers frequently announce “intent” to launch random programs in future, with no money provided in the current year’s budget.

For electronic media it is a major marketing event to enhance their TRPs and revenue. In essence, the format of their election coverage and budget coverage is the same. There is absolutely no correlation between the pre-election & pre-budget analysis, and forecasts to the actual outcome. Also, it is difficult to make any sense from the post-election and post-budget analysis and commentary.

Hours of airtime have already been spent on the pre-budget analysis this year also. Besides, hundreds of reports have been printed to guide investors about the investment themes that may emerge from the budget. What I gather from various sources is that the  five most common points of the pre-budget speculations this year are:

What will the finance minister do with the bounty (Rs2.11trn) it received from the RBI as dividend? Whether the excess funds will be used to reduce the fiscal deficit; or these will be used to fund some populist programs to win forthcoming assembly elections; or these will be granted to the key NDA allies (JDU and TDP) to meet their demand for additional resources for their respective states.

Will allocation for Capex be increased materially or focus will shift to consumption and social programs? It is basically a speculation on the impact of the latest Lok Sabha elections on policy making.

Will the impetus to private capex be enhanced? The speculations are broadening the scope of PLI schemes; relaxation in FDI norms for certain sectors; etc.

Will the finance minister afford more cash in the hands of households to support consumption growth – the missing piece in India’s growth in the past few years? The speculations are tax relief for salaried classes; disincentive for 80C savings; increase in cash payout for farmers etc.

Will there be any change in the Long-Term Capital Gains tax regime? There are speculations of more uniformity in LTCG rules for various asset classes.

A majority of the market participants watch the budget speech to take advantage of swing trade opportunities that may arise from uttering some specific jargon by the finance minister. The empirical evidence shows some gain and most lose money in this joyride.

I am taking my daughters shopping today at 11AM and will be reading the Finance Bill and other budget documents in the evening.

What about you?

I had an opportunity to meet a group of market participants and industry representatives at a corporate event this week. The discussions over lunch and tea revolved around the three broader topics – (a) State of equity markets; (b) Expectations for the final Union Budget for FY25; and (c) Corporate performance. Unsurprisingly no one was interested in discussing politics, geopolitics and the US Fed’s policy.

(Note: I had last shared my investment outlook and strategy for the financial year FY25 in April 2024. Since then, there have been some changes in circumstances. The global financial system is more stable. Stock markets have done very well. The geopolitical conditions are more stable; and the price situation appears to be in control at both domestic and international levels. The domestic growth continues to surprise on the upside and the external balance is much more stable. The political overhang in the domestic market is over with the general elections. To accommodate these changes, I have made some changes in my outlook and strategy as outlined in April 2024.)

In my view, the stock market outlook in India, in the short term, is a function of the following seven factors:

(1)        Macroeconomic environment

(2)        Global markets and flows

(3)        Technical positioning

(4)        Corporate earnings and valuations

(5)        Return profile and prospects for alternative assets like gold, real estate, fixed income etc.

(6)        Greed and fear equilibrium

(7)        Perception about the political establishment

The outlook for these seven factors for next 6-9 month is as follows, in my view—

Macroeconomic environment – Positive

My outlook for the likely macroeconomic environment in 2H2024 is as follows:

(a)        Inflation: The consumer inflation may average close to the lower bound of RBI’s tolerance bound of 4% to 6%.

(b)        Fiscal Deficit: The fiscal situation of the central government may remain comfortable as the tax collections remain steady and revenue expenditure is controlled further.

(c)        Rates: Expect benchmark yields to average in the 6.85% +/- 15bps range. The RBI may stay on ‘pause’ for now. Deposit and lending rates may stabilize around current levels, the liquidity may ease in the forthcoming busy season as government spending accelerates.

(d)        Current Account: Expect current account balance to stay negative as import growth continues to outpace exports. The deficit may average around 1.25% to 1.5% for 2H2024.

(e)        Savings: Household savings may continue to grow at a slower pace as real wage growth remains poor. Aggregate corporate savings though may be higher due to continued deleveraging and rise in free cash flows.

(f)         Investment: The government investment expenditure may sustain at current pace. Private capex may see further recovery in 2H2024. Overall, investment growth may see decent growth.

(g)        Exchange Rate: USDINR may average close to INR83.5 +/- 1 range on a stable current account and higher Fx inflows.

(h)        Growth: The real GDP growth for FY25 may average around 7% despite a slower global economy, on the back of better manufacturing and good monsoon. Overall, macroeconomic outlook is positive.

Global markets - Neutral

The global analysts and economists are nearly unanimous on the growth stability in 2H2024. The likely monetary easing and stable geopolitical conditions may support growth stability. The outlook for USD is neutral as central bankers remain on a corrective path.

Technical Positioning – Negative

Technically, in my view, the benchmark indices may witness a decent correction in 3Q2024 before a sustained rise. At present level thus Nifty offers a negative risk reward.

Technically speaking, Nifty may move in the 20210-24995 range in 2H2024, averaging above 22635. There could be occasional violations of this range. Buying below 22700 will therefore carry a positive risk reward.

Corporate earnings and valuations - Neutral

The earnings growth momentum is peaking after three years of strong show. The visibility of margin improvement is clouded as capacity utilizations are high and companies are initiating expansion plans. Raw material prices are also now ticking up.

The present forward valuations are slightly above long-term averages based on still marginally optimistic earnings forecasts. However, 2H2024 may not witness a material PE derating as macro fundamentals remain strong and visibility of flows is improving.

Alternative return profile - Neutral

Real estate: Real estate prices may not rise materially in 2H2024 as more supply hits the market higher interest rates begin to bite and government incentives are withdrawn gradually.

Gold: Presently, there is no major trigger for the global gold prices to rise significantly in 2H2024. Save for a major geopolitical escalation, gold offers a neutral to marginally negative risk reward.

Cryptocurrencies: In the past couple of years, Cryptocurrencies have emerged as a notable alternative asset class. Being a new asset class the level of understanding and awareness about this asset class is still low, though the participation has risen exponentially. This combination of low understanding - high participation makes it highly volatile. Nonetheless, its popularity remains high and this trend may continue in 2H2024 as well.

Fixed income: The corporate bond yields and deposit rates appear to have stabilized and may see some downward bias in 2H2024. The yield gap is now not material. Overall, in my view, the return profile of alternatives is neutral for equities.

Greed and fear index – Negative

Historically, the most successful, though intuitive, indicator of greed overtaking the fear in the market is sharp outperformance of small cap stocks over large cap stocks. Besides, the volatility index, another gauge of fear, has remained low despite several concerns emerging.

The recent sharp outperformance of smallcap stocks and unsustainable euphoria in few pockets of the markets, indicate that greed is dominating the sentiments. The Greed and Fear balance therefore is negative presently.

Perception about the political establishment - Positive

Strong commitment to promote manufacturing in India; positive outcome of thrust on self-reliance and firmly controlled fiscal balance is keeping markets’ perception about the political establishment positive. However, any significant losses for BJP in the assembly elections scheduled in 4Q2024 may require a review of this position.

Outlook for Indian markets

In view of the positioning of the above seven key factors, my outlook for the market in 2H2024 is as follows:

(a)   NIfty 50 may move in a large range of 20210-24995 during 2H2024. It would be reasonable to expect low single digit return for the 2H2024 on diversified portfolios.

(b)   The outlook is positive for IT Services, Pharma, Specialty & Agro Chemicals, Capital goods, organized retail and consumer durables. Commodities and Financials are neutral.

(c)    Benchmark bond yields may average 6.85% +/- 15bps for the year. Long duration yields may do better in 2H2024.

(d)   USDINR may average close to 83.5+/- 1 and move in the INR82.5-84.5/USD range.

(e)    Residential real estate prices may ease in most metro and large cities.

Some key risks to be monitored for the market in 2H2024

1.    Weather conditions especially poor distribution of monsoon rains.

2.    Worsening geopolitical situation in Europe and Asia.

3.    A recession forecast for FY26.

4.    Sharp rise in credit cost for lenders.

5.    Unusual rise in rural stress.

2H2024: Investment Strategy

Asset allocation

2H2024 appears to be marginally worse than 1H2024 as the market technical have worsened. Accordingly, I am changing my primary investment objective to “low returns and capital preservation”. I believe that the market may continue to offer attractive opportunities to build a good portfolio for the period beyond 2024.

I shall continue to maintain standard allocation in 2H2024; and increase active trading in my equity portfolio to optimize return. My target return for the overall financial asset portfolio for 2H2024 would be 8% annualized.

Equity investment strategy

I would maintain a 60:30:10 mix of large, midcap and smallcap stocks.

(a)   Target 18% annualized appreciation from my trading portfolio;

(b)   Overweight on Chemicals (specialty and Agro Chem), IT Services, Pharma, organized retail and niche consumer stocks.

(c)    Underweight on financials and avoid PSUs.

The first half of the year 2024 has been good for global markets. Despite disappointment on rate cuts, geopolitical concerns, sticky inflation, and political changes in many countries, stocks, precious metals, industrial commodities and crypto made a steady move up with very relatively low volatility.

A notable feature of the global market movement in 1H2024 was the stark underperformance of Asia ex Japan, even though the Japanese equities being the best equity markets amongst the major global markets. Brazil also underperformed despite a decent rally in commodities.

Another notable feature of global markets was the narrow market breadth of US markets. Though the benchmark indices scaled new highs, it was mostly due to parabolic rise in a handful of technology stocks.

At present equity markets appear strong on the back of a resilient demand environment, well anchored inflationary expectations and peak interest rates. Fears of earnings failing to match the stock price rise, escalation in geopolitical tensions, spike in energy prices, uncertainties about the policy direction post the US presidential elections, and erratic weather conditions are some points of concern.

India performance – 1H2024

Indian markets performed very well in the first half of the year 2024. Though Indian equities underperformed the developed markets in line with the global trend, it did very well within the emerging market universe. The key highlights of the India market performance could be listed as follows:

·         The benchmark Nifty50 gained ~10.5% during 1H2024; while the Midcap (+20.7%) and Small Cap (+21%) did much better. Consequently, overall market breadth has been strong.

·         Two third of the market gains came in the month of June 2024, post the elections. This was contrary to the pre-election consensus that BJP failing to secure a majority on its own may result in sharp decline in market.

·         The total market capitalization of NSE is higher by ~21%; more than gains in the benchmark indices – implying that stronger gains have occurred in the section of the market beyond indices.

·         The number sector outperforming the benchmark indices far outnumbers the sector underperforming. The rally was led by Realty, PSUs (mostly power, defense, and railway), Auto, infra and energy. The Capital Goods and Heavy Engineering sector have been the flavor for the period. Particularly, the businesses catering to sectors like defense, railways, and road construction did extremely well. Banks, IT Services and FMCG were notable underperformers.

·         Ship builders were the notable outperformers amongst the individual stocks. No conspicuous sectoral trend was seen for the losers.

·         Institutional flows to the secondary equity markets were positive for five out of the six months. 1H2024 witnessed a total flow of ~INR3559bn, despite FPIs outflows of Rs320bn. The correlation of institutional flows with Nifty returns remained poor (~48%).

·         The rates, currency and yields were stable in 1H2024. Policy rates were unchanged; while money market rates were marginally higher by 15bps. Deposit rates did not see much change while lending rates were higher by 10-15bps.

·         The overall Indian yield curve shifted lower and flattened completely, as the RBI maintained the status quo on policy stance.

·         The economic growth surprised on the higher side with the Indian economy recording a growth of 8.2% for FY24, beating all forecasts materially. Fiscal balance also improved with FY24RE fiscal deficit coming at 5.8% and FY25BE of fiscal deficit at 5.1%.

·         CPI inflation has inched closer to the lower bound of the RBI’s tolerance band of 4%-6% with May’24 CPI inflation number coming at 4.75%.

• Corporate performance has shown resilience in recent quarters, with sales growth recovering, margins improving and RoE rising. Banks reported consistent improvement in the asset quality and profitability.

 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.

 Low household credit in India has been a long running theme for investors in India. In the past three decades, I have observed that almost every presentation made by brokers, money managers, investment advisors, lenders, companies catering to discretionary consumption etc., has highlighted this phenomenon. The market participants and companies have consistently emphasized on low household credit as a single most significant factor enhancing the growth potential of, particularly, financial services and discretionary consumption sectors.

However, in the past one year, the narrative seems to have changed somewhat. These days, it is not uncommon to find rising household credit being cited as a key risk to financial stability. The Reserve Bank of India and many analysts have mentioned this factor as a key stress point for the financial stability.

The latest Financial Stability Report released by the RBI notes that “At 40.1 per cent of GDP26, the stock of household debt in India is relatively low when compared to other EMEs, but in relation to GDP per capita, it is comparatively high. With overall household savings declining to 18.4 per cent of GDP in FY:2022-23 from an average of 20.0 per cent of GDP over 2013-2022, and coupled with an increasing trend in financial liabilities, household debt warrants close monitoring from a financial stability perspective.” It further notes, financial liabilities of households have risen in the post-pandemic period, as reflected in the surge in retail loan growth for financing both consumption and investment. Alongside, agricultural and business loans have also grown. Notably, more than two-thirds of borrowers are of prime and above credit quality.

In the post pandemic period, sector wise retail credit growth has remained the strongest. Personal loans have grown almost at 1.5x pace compared to overall credit growth. The growth of unsecured personal loans (including Credit card receivables, Consumer durable loans and Other personal loans) in banks from March 2017 to March 2023 stood at CAGR – 21.0 % outpacing the personal loan growth which exhibited a CAGR of 19% during the same period. Unsecured personal loans account for almost 1/3^rd of the overall bank’s personal loan credit of ~Rs. 41 lakh crores as of March 31, 2023.

Financial inclusion, transformation of consumer behavior, change in lenders’ focus, and enhanced leveraging of technology in lending are some of the reasons cited for the sharp rise in household credit. Household savings hitting almost 50 year low (~5% of GDP) is also one of the reasons for rise in household credit.

As per the recent data released by the RBI regarding sectoral deployment of the credit, the retail credit (constituting 1/3rd of the overall non-food credit) growth stood strong at 17.8% YoY in May’24. Within the Retail segment, credit growth stood strong across Housing (16.9% YoY), Vehicle Loans (17.9% YoY), Loans Against Gold Jewellery (29.7% YoY) and credit card outstanding (26.2% YoY).

It requires an in-depth study to establish whether the rising household credit is sustainable and good for the Indian economy, hence the markets, or a cause of concern.

As I mentioned earlier, this is something which everyone was looking forward to for a long time. Now since it is materializing, should markets be celebrating it or being worried about it!

In my view, dominance of consumers over producers is a natural evolution of growth. Almost every developed and middle-income economy has witnessed this transition in their course of development. India shall be no exception. The concern could be if it is too early for this transition in India, given the high level of poverty, infrastructure inadequacies, energy insecurity, and inadequate legal and regulatory framework.

I am not competent to comment on this. Maybe some experts will conduct deep research to conclude whether the “consumer finance” is already a mature theme in India or still a sun-rise sector. This will determine what kind of valuations should be afforded to the institutions extending unsecured personal loans.

The Reserve Bank of India (RBI) recently released the half yearly Financial Stability Report (FSR). A key highlight of the latest FSR is RBI’s confidence in the resilience and sustainability of growth in the Indian economy.