Do it yourself

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

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

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

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

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

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

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

Nifty YTD2024: Decent performance, but lags alternatives

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

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

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

Foreign investors trim equity stakes to the lowest since GFC

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

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

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

 

Market breadth worsening

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

 

Volumes shrinking

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

 

Market cap at 136% of GDP

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

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

Orderly weakening of USDINR, bonds stable

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

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

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

The year 2024 is proving to be one of the worst years for political soothsayers. After a debacle in the Indian general elections last summer, psephologists have failed in the US presidential elections. The challenger Donald Trump emerged a winner, gaining popular votes to occupy the White House for four years with a clear majority in the US Congress and Senate. This kind of decisive mandate has been a rarity in US politics in the past four decades. Most of the media, political commentators, psephologists, and other experts completely failed to read the peoples’ mind and anticipated a victory for Kamala Harris.

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

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

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

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

Go back to villages

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

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

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

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

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

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

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

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

Pragmatic business regulation

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

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

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

The central government presently derives 63% of its resources from taxes (Direct Taxes 36% and Indirect Taxes 27%). 27% comes from borrowing and 10% from other sources.

The present socio-political milieu is such that (i) the central government is becoming increasingly dependent on the regional parties, hence it is imperative that it would need to allocate more resources to the states ruled by the supporting regional parties; (ii) a larger proportion of the population is becoming increasingly dependent on the government for the basic necessities like food, shelter, education and healthcare, requiring the basic social sector spending to rise without any major improvement in the quality of life; (iii) supply side pressures are not abetting, keeping the inflation (including imported inflation) elevated, pressurizing USDINR and yields; and (iv) economic growth continues to be disproportionately dependent on government spending (both revenue and capex).

Under these circumstances, the government shall continuously be under pressure to augment its revenue. The challenges it faces are — (i) personal tax rates are already stretched; (ii) actual number of income tax payers is consistently declining despite decent rise in the IT return filers; (iii) corporate tax hikes at this stage will send wrong signals to the global investors; (iv) GST rates are widely anticipated to be moderated; (v) disinvestment process has totally derailed and not expected to come on track anytime soon due to the political rhetoric; (vi) dividend from CPSEs is close to peaking; and (vii) FRBM targets require deficit cuts putting a cap on additional resource mobilization through borrowings.

The investors need to contemplate from where the government will attempt to raise the additional resources in the coming years to sustain public spending. The answers may have material implications for the investment strategy and market direction post Budget in February 2025.

 For me, Diwali this year was certainly not as it ought to be. Untimely demise of many close friends and relatives in the past few months; incessant horrific news flow from the active war zones; conspicuous signs of extreme socio-economic stress in a majority of the population; and apathy of the administration towards common man’s plight and worsening law & order situation dampened my spirit of festival.

I spent the week wandering the streets, slums and villages of Delhi NCR region and adjoining districts. What I witnessed and experienced, makes me believe that blaming selling by the foreign investors for the extant pain in the stock markets is like treating “the effect” as “the cause” – which is not only inappropriate but borders foolishness.

Household inflation, unemployment (including underemployment, disguised unemployment and most importantly unemployability), lack of basic civic infrastructure (drinking water, sanitation, primary health, decent primary education, etc.), are serious challenges for even the citizens living in the national capital or in its vicinity.

It is clearly evident that household savings and consumption may continue to face strong headwinds in the short term (4-6 quarters) at least. It shall reflect on the asset quality of the lenders, fiscal balance (rising reliance on the fiscal support for food, healthcare, education, and constricted ability for revenue mobilization) and eventually slow down the capex growth. 2QFY25 results declared so far are indicative of some of these trends.

I also find the stress in household finance management manifesting in the elevated anger and anxiety in the personal behavior of citizens. A sharp rise in the instances of domestic violence; social aggression; racial & religious intolerance; addiction to drugs, alcohol, & pornography; and insolent disregard for compliance, are some of the conspicuous effects, especially in the lower strata of the population. Rise in corruption and ostentatious consumption (as an act of denial of the actual state or to deceive others) are only a couple of economic consequences.

I also gathered some pearls of wisdom during the Diwali week, which I would like to share with the readers.

End of home cooking approaching?

A reputable entrepreneur shared his thoughts on the likely future trend in the food industry. In a tweet on Diwali day, he wrote, “In my view in 2040: For every 1L population at least one “Food Factory” will operate. From it, for 5 KM radius food will be delivered at home in 10 mins by a drone or a driverless EV. 50% of the population will not use the kitchen even once a week. 80% of hotels will not exist.” Many comments to this tweet mentioned that 16 years is too long a period. This trend may emerge in the next 5-7 years. The necessity of two incomes to run a kitchen may be one of the major factors in forcing the ‘homemaker’ out of home for work.

It is pertinent to note that as per the latest Annual Survey of Industries (ASI) Factories producing food products, 16% of the total number of factories, are now the largest category of industrial units in the country. These factories employ 21,16,000 or 11.4% of the total industrial workers, more than any other industry. The traditional largest employer, textile industry, comes a distant second employing 17,23,000 workers. (see here)

It would be interesting to see what changes the kitchen appliances industry would face due to this emerging trend.

Gulab Jamun is real villain not Soan Papdi

In the past decade or so, the Soan Papdi memes have become an essential part of the Diwali festivities. Once a cherished delicacy, a traditional sweet Soan Papdi has become a joke for everyone, as the modern health-conscious find this particularly sweet very unhealthy and prefer to pass it to others instead of consuming it themselves.

A sweet-maker (Halwai) in Hathras town in Uttar Pradesh educated me on this. As per him, if properly made, Soan Papdi is actually not unhealthy. It is made of besan (gram flour) which is protein rich and not deep fried. On the other hand, the worst sweet is Gulab Jamun – Maida (refined flour), deep fried (mostly in extremely unhealthy reused palm oil), and soaked in sugar syrup for days. It has no nutritional value and tons of ill effects. So, the next time you gulp a savory Gulab Jamun, please be mindful.

Kiwis whitewash the men in blue

The Indian men’s cricket team lost their first test series in India after 2012, after 18 consecutive series victories. The New Zealand team defeated India 3-0 in a three-test series. The worst part is that all three tests were lost very badly. For example, on the third day of the third test, India needed just 146 runs to win the test. On home ground, for a team that bats right till number nine, it should not have been very hard. If only the coach had told all the eight batsmen that “they need to score 19 runs each, and they have 25 overs each to achieve this task. There is no rush and no need to hit boundaries.”

I think all the young investors, who have started their investment journey in the past four years, could draw an important lesson from this. They need not chase the stocks that hit daily limits frequently. They just need to find 10 companies that are most likely to grow their earnings @15% CAGR for the next five years. Investing in these companies may double their capital in the next five years. It is as simple as that.

Internecine celebrations

The residents of the national capital blew up billions in burning firecrackers on Diwali night, despite the dangerous level of air quality, sick children and old parents in their homes, a government order prohibiting non-green crackers, and stretched finances. They offered the most ridiculous of the arguments to justify this act of assured mutual destruction.

In all their sincerity, they believed that by doing so they are (a) protecting their religion; (b) telling other religious communities their true place in the society, and (c) rebelling against the government’s minority appeasement policies.

Little did they realize that (i) they have burned their hard-earned money; (ii) added more poison to the already poisonous air; (iii) poisonous air does not discriminate between Hindu and Muslim lungs & brains, and it would kill both equally; and (iv) the people who claim to be more fierce religious warriors come mostly from lower middle and poor classes, spend most money on firecrackers are the worst affected by the poor air quality. Their children and old parents will suffer the most and they would spend the most on their healthcare.

The administration and law enforcement agencies bother little about their welfare. Like the colonial British government, they are happy seeing the society divided and killing each other. The educated and rich are getting disenchanted from festival celebrations, slowly dissipating the Indian culture and traditions. This is what the colonial rulers always strived for – destroy their culture and traditions, and the people will love to be slaves.

Recently the Ministry of Statistics and Program Implementation, Government of India, released the results of the latest Annual Survey of Industries (ASI) for the reference period FY23. The Annual Survey of Industries is conducted with the primary objective to provide a meaningful insight into the dynamics of change in the composition, growth and structure of various manufacturing industries in terms of output, value added, employment, capital formation and a host of other parameters.

I note the following key points from the survey results.

Key statistics (five-year period from FY19 to FY23)

·         Number of total factories in the country has grown at a CAGR of 1.2%, despite the government’s strong emphasis on manufacturing and multiple incentives.

·         Total fixed capital (investment) employed in manufacturing has recorded a growth of 4.4% CAGR. Total invested capital has grown at a CAGR of 6.5% during this period, implying higher working capital requirement.

·         Total employment in the manufacturing sector has grown at a CAGR of 3.2%. This is sharply lower than the rise in the labor force.

·         Total factory output has risen at a CAGR of 11.8%, while output per worker recorded a growth of 4.8% CAGR.

·         Average industrial wage has grown at a CAGR of 5.1% against the average CPI inflation of 6.6%, implying sharp deceleration in the real wages.

·         The ratio of contract workers to the total workers has increased from 38% (FY19) to 41% (FY23).

·         Manufacturing productivity has shown some improvement, but this may be far below the desired levels. Fixed capital to output ratio has improved from 37% to 28%. GVA to fixed capital ratio improved from 44% to 53%. Wage cost to NVA improved from 36% to 34%.

Stark regional imbalances

Five states account for more than 52% of factories in the country. The nature of activities, productivity and employment level of the industry in these states also appear to be different.

·         Tamil Nadu accounts for 15.7% factories, deploying 7.9% of the total fixed capital, employs 15% of the total industrial workers and produces only 10.3% of GVA - implying more proportion of labor-intensive small industries.

·         Gujarat accounts for 12.2% factories, deploying 19.7% of the total fixed capital, employs 12% of the total industrial workers and produces 14.8% of GVA - implying dominance of heavy capital-intensive industries.

·         Amongst the top five industrial states, Uttar Pradesh is the least productive. The most populous state in the country accounts for only 7.5% of total factories, employs 8% of the total industrial worker and contributes just 6% of GVA.

Food business getting more organized

Factories producing food products, 16% of the total number of factories, are now the largest category of industrial units in the country. These factories employ 21,16,000 or 11.4% of the total industrial workers, more than any other industry. The traditional largest employer, textile industry, comes a distant second employing 17,23,000 workers.

Food products industry now contributes 7.1% of the manufacturing GVA, 73% more than the 4.1% contribution of the textile industry.

…but basic metal continues to dominate

Basic metals’ industry employs 17.6% of the total fixed capital, and contributes 11.6% of the GVA. The employment intensity of the Basic metal industry is low as it employs only 7.6% of the industrial workers.

Last weekend, I happened to meet a senior IT professional, aged 48yr. This gentleman has worked with many global IT services companies like IBM, Google, etc. He has his wife and two teenage daughters in his family. Four years ago, he quit his job and took to equity and derivative trading as his full-time occupation. He even developed an algorithm of his own for trading in options. He did very well till March 2024, earning an IRR of over 54% on his capital deployed in the trading business. With a material growth in his earnings, his lifestyle changed dramatically. He bought a bigger house, bought a luxury sedan for himself and a car for his daughters' use. They travelled business class on their Europe and America trips.

In April 2024, he grew in confidence and increased his exposure materially, deploying all his savings in the market. In the past 6 months, he has lost 70% of his enhanced capital in option trading; and is close to defaulting on his house EMI. The losses in the market are not his primary worry presently. He is more concerned about convincing his family for a downgrade in their lifestyle.

After discussing various aspects of his problem, I concluded that he may not be an isolated case. There may be hundreds of other full-time traders who have witnessed this ‘wealth effect’ in the past 3-4 years and may be fearful now.

Wealth effect

Arthur Pigou, an American economist, coined the term “the wealth effect” in a 1943 article. The idea was to measure the changes in consumption based on the change in the values of housing and financial assets. He argued when asset values are high consumers feel wealthy and go shopping: when asset values are low consumers slow spending. As a result of the concentration of American wealth in home equity, the level of housing prices can dramatically impact consumer confidence.

Daniel Cooper (Federal Reserve Bank of Boston) and Karen Dynan analyzed the Wealth Effects and Macroeconomic Dynamics in a 2016 research paper. The paper stated that “The effect of wealth on consumption is an issue of long-standing interest to economists. The relationship is particularly important from a policy perspective, given the large swings in financial asset prices and property values over the last few decades in both the United States and many other developed countries. The conventional wisdom is that the resulting fluctuations in household wealth have driven major swings in economic activity. Indeed, the plunge in asset prices during the financial crisis is frequently cited as an important contributing factor to the unusually slow economic recoveries in the United States and some other developed countries. Similarly, the large drop in asset prices in Japan following their peak in 1990 is viewed as having restrained growth during the subsequent decade in that country.”

The paper also highlighted that a great deal of empirical research over the last 25 years has focused on the so-called wealth effects – the impact of changes in wealth on household consumption and the overall macroeconomy. The research has yielded some important findings about the nature of household wealth effects, but consensus has yet to be reached on many important issues.

The authors concluded that “Understanding wealth effects is critical not only for forecasting consumption and broader economic growth well, but also for gauging the risks to the economic outlook and setting appropriate macroeconomic policy. Such issues are particularly important during periods of large fluctuations in asset prices.”

I could not find any noteworthy research related to the wealth effect specifically in the Indian context. However, anecdotally we can find several cases like the gentleman referred to earlier in this post. In my view, the policymakers in India need to take cognizance of the wealth effect generated by the supernormal returns from the equity investments and real estate in the past four years.

I also note, in this context, the outcome of the latest Consumer Confidence Survey (CCS) of the RBI. Despite several headwinds in terms of slowing growth, rising cost of living, slower real wage growth, and challenging employment environment, and pessimism about the current situation, the consumers’ future expectations remain optimistic. This might send erroneous signals to the policymakers, producers, sellers and service providers.

I shared some of my random thoughts with the readers last week (see here). Many readers have commented on my post. Some readers have raised some pertinent questions and also provided very useful feedback. Based on the readers’ comments, questions and feedback, I would like to share some more random thoughts. It is however important to note that I am a tiny insect living in a cocoon of my own. I cannot comment intelligently on the international markets, policy matters and geopolitics. Nonetheless, I reserve my rights to form strong views on global and domestic developments concerning markets, policies and geopolitics, for my personal strategy purposes.

The US debt end game

The current state of the Fed balance sheet and the US public debt is certainly not sustainable by any parameter. It is a matter of debate how the US government and the Federal Reserve would make fiscal and monetary corrections and eventually return to an acceptable level of public debt without pushing the economy into a deep recession (hard landing). One of the most talked about resolutions to this conundrum is to keep bond prices lower and buy back aggressively over the next few years. That may be one of the easiest ways to return to fiscal sanity. Creating an artificial shortage of USD and forcing UST holders to sell cheap could be one of the means to achieve this target. To create USD shortage, a reverse carry trade might be induced, by narrowing the yield spreads, besides reducing CAD through tariffs and other trade restrictions.

For context, the US is running a quarterly current account deficit in excess of US$260bn; a fiscal deficit of over US$1.7trn (2023) and USD supply (M2) of over US$21trn. The US GDP was US$27.4trn in 2023, accounting for roughly 26% of the global GDP.

The great gambler

The RBI governor's job in India might be the most unenviable one. He has to struggle 24X7 to maintain a balance between fiscal requirements, political consideration (inflation and small saving interest), growth needs (real rates) and balance of payment (USDINR exchange rates). Repo rate and open market operations are the only two major tools available to him.

The RBI has been maintaining a status quo on the repo rates for over a year now. This has sustained the US-India yield gap (to protect flows) to some extent, but the efficacy of high repo rates in ensuring price stability, which is the stated primary objective of the RBI’s monetary policy, is questionable. Besides, the RBI has been meaningfully enlarging its balance sheet in the post Urjit Patel era, while stated policy objective, until the last week, has been “withdrawal of accommodation”. This aspect is not talked about much in the public domain. One may speculate that the real objective of the RBI’s monetary policy has been to prevent USDINR appreciation (even if it means high imported inflation) and ensure sufficient inflow in small saving schemes, which are funding almost 45% of the union government’s fiscal deficit. It has been obviously playing a gamble with high stakes, US$700bn forex reserve notwithstanding.

 Indian lenders face challenges

The persistent negative credit deposit ratio of Indian banks has been a subject of discussion at all levels. The government, regulators (RBI and SEBI), bankers and analysts etc. have all expressed concern over the poor deposit growth, while the credit demand remains strong. The finance minister and RBI have even attributed the flow of funds towards capital markets as one of the reasons. In my view, high household inflation, poor real wage growth and very low real rates on deposits are the primary reasons for this trend. Besides, for most lenders the asset quality improvement trend that started five years ago may have already peaked.

I feel most Indian lenders may now face three challenges – declining margins as the cost of funds rises; flat to declining asset quality and slowing growth. Investors are cognizant about these challenges but as the response to a recent IPO of a housing finance company indicates, they may not have yet adjusted their respective investment strategies.

Focus on finding opportunities

As a wise man suggested, the small investors like me should not be wasting energy on bothering about these macro things and focus on finding the investment/trading opportunities which may be opened by policy missteps, fund flows, geopolitical tensions etc. I fully agree with this thought. For the next 4-5 months, I shall be focusing on finding opportunities and taking advantage of traders’ mistakes.

Last week we celebrated Dussehra – a festival that for centuries has marked the victory of good (Ram) over evil (Raavan). Burning of effigies of Raavan, his brother and son has been an integral part of this celebration (particularly in North India) for over a century. This year was not the same though. There were scattered instances of people worshipping Raavan and protesting against burning of his effigies. Some elements of the Indian society discovered a caste angle in this and termed Dussehra festivities as a conspiracy against the upper caste brahmins, to which Raavan is believed to belong. This may be a small beginning, but my discussion with many educated people indicates that it may not be long before Raavan worshipping emerges as a popular cult in India. For context, I have not heard or read any leader or wise man critical or concerned about this; though some social media commentators did appear amused.

                                        (Photo credit social media)

Many years ago, a wise man advised me to “Believe in your strengths and weakness”. Without giving it a thought, I replied firmly, “I do!” He paused for a while and said calmly, “knowing is different from believing. For example, you know that you will die someday. But do you really believe it!” I understood the meaning of what that wise man was trying to tell me, many years later.

We all, especially our politicians and social media activists, know the strengths and glorious past of our country. But do we really believe in that? In my opinion, no, we do not!

We all know, religion is at the core of Indian society. The Indian political and economic paradigms therefore must be constructed around religion.

Even a cursory study of Indian history, whether critically proven or mythological, would suggest that the best economic and political periods in the history of the sub-continent were when a righteous king at the helm protected and promoted religion. Conversely, the worst periods, economic and political, were those when some tyrant attempted to destroy religious beliefs and knowledge.

Traditionally in India, education, research, arts, architecture, science, and the State itself, have all developed and prospered around religion. Religion was also woven intricately with agriculture, which was the primary profession.

By adopting secularism as a major social construct, especially since the 1970s, the Indian State has unfortunately equated religion with bigotry. This has not only made religion a divisive (instead of bonding) force, but has also led to the degeneration of strong traditions of seeking spiritual, scientific and material knowledge for the larger welfare of the human kind.

In the past five decades we have reached a stage where religion is used to evoke fear & violent passion in people's minds and manipulate them. Money & power, and not knowledge & evolution, seem to have become the primary aim of religion. Ignorance and superstitions are destroying people's lives. It is commonly seen that the gullible people borrow money to feed illiterate and unscrupulous persons, whose only quality is their surname.

Intelligentsia and academics are scared to explore and propagate the tremendous wealth of knowledge stored in traditional scriptures for the fear of being labeled "communal and bigot". Politicians are scared to promote the traditions of knowledge seeking and spiritual evolution. A society of seekers is degenerating into a society of xenophobes. The consequences are that the entire nation bothers about winning one medal in any global supporting event but does never bother about winning a Nobel in mathematics, physics or medicine.

I had the opportunity to interact with many Indian Vedis scholars. I have no doubt about the superiority and purity of their knowledge base and understanding. The Vedic tradition is inarguably one of the best-known ways of life with "seeking" as its fulcrum. The modern problem however is that people claiming to have knowledge, do not want common people to "seek". They want us to accept whatever they offer. I want the Vedanta to be my spiritual guide. They just want me to wear the Vedanta as my identity (Hindu) as a badge, and claim superiority over other religious identities.

I have been hearing the phrase "21st century belongs to India" for the past three decades. Many politicians and analysts have used this cliché to emphasize the tremendous economic opportunities that India could offer in the next few decades, given its young demography. The list of investors and global States seeking strategic partnerships who have been excited by the potential is long and impressive. The list of investors and Statesmen who have been disappointed in the past two decades may be even longer.

The point to evaluate critically is whether India sans its core ethos is viable as an economic and strategic power house! In my view, perhaps ‘not’. Remember, startups and advanced technology are a necessary good in the modern times. But the policymakers must believe that Apple, Facebook, Twitter, NVIDIA, Tesla and Amazon etc. are outcome of a Society that promotes and cherishes knowledge seeking and freedom of thought. It is not the other way round.

The current market condition reminds me of one of my favorite bedtime stories. I love to narrate this time and again.

Once upon a time a sparrow couple made their nest in a wheat farm. In a few days, the lady sparrow laid four eggs. In two weeks, eggs were fully hatched and four chicks were born. In the meantime, the wheat stems had started growing tall. In another two weeks, the chicks started to fledge and the wheat kernels began to turn golden. This was the day when parent sparrows first discussed leaving their nest and moving somewhere else.

“The crop will soon be ready for the harvest. Our nest shall be exposed and trampled by the harvesters”, the lady sparrow feared. Her companion however was not worried as yet. “Nothing to worry as yet”, he assured her.

In another three weeks, the farm turned completely golden with wheat completely ripe to harvest. The lady sparrow was terribly worried now. “We must fly out now. The chicks have also grown up now and can easily fly to the woods behind the hill”, she argued with her companion. “Nothing to worry about yet. We have plenty of food here. Let chicks eat good and become strong”, the companion remained nonchalant.

In a couple of days, the farmer came to the farm with his wife. He looked at the ripe crop with pride and said, “we shall now call my brothers and begin harvesting the crop from tomorrow”. They soon left the farm. The lady sparrow was terribly frightened now. "Must fly out right now”, she coaxed his companion and chicks. “Nothing to worry for now”, the companion quipped, playing with the chicks.

After a couple of days, the farmer again came to the farm with his wife. “My brothers are all thankless and selfish”, he said annoyingly. I would help them whenever they need, but they have refused to help me in harvesting. I shall now call all my neighbors and begin harvesting from tomorrow. “I beg you please let’s fly out now”, the lady sparrow pleaded with the family. The children had become strong and comfortable in the farm by now. “Not yet”. The companion reiterated. The children agreed.

One more week passed, nothing happened. One day the farmer and his wife again came to the farm. He saw that the wheat kernels were beginning to wither now. The golden crop had developed many black spots. “We live in a world full of selfish and thankless people. We cannot count on anyone for help”, he said furiously to his wife. “Let’s buy our own tools and begin harvesting ourselves from tomorrow”, the farmer said resolutely. “Hey guys let’s get ready, it’s time to fly out”, the sparrow told his companion and children, with a sense of urgency. “What happened now” the lady asked. “Farmer have realized that no one helps those who do not help themselves”. He will definitely come tomorrow and begin harvesting, the companion explained.

In the past three years there have been many instances that made investors nervous about markets. The Russian invasion of Ukraine; ruling BJP reduced to a minority in the Lok Sabha elections, escalation of hostilities between forces of Israel and Palestine, Lebanon, Syria, Iran etc. All these instances raised the specter of a deeper market correction, provoking investors to lighten their equity exposure. The market however continued to belie their apprehensions, and continued to climb higher, simply because earnings were supporting. Now, for the first time in the past 3 years, earnings are showing fatigue and are expected to grow in single digit in FY25, with decline in margins. This is the time investors need to review their equity exposure and take corrective action.

As per the current estimates, FY25E NIFTY50 EPS is expected to grow ~8% (vs over 18% each for FY23 and FY24). FY26E estimates are presently hovering around ~15% growth but may see further downgrades.

In my view, earnings growth with margin improvement is the only sustainable factor for rise in stock prices. Rest all factors may add to the momentum, which if not supported by earnings growth, inevitably fizzles out in due course.

Yesterday, the Reserve Bank of India announced the outcome of the meeting of its Monetary Policy Committee (MPC) held on 7-9 October 2024. The MPC decided to:

(i)    Leave the key policy rates unchanged with a majority 5:1 vote. Dr. Nagesh Kumar (the recently inducted MPC member) voted in favor of a 25bps cut.

(ii)   Change its policy stance from change from withdrawal of accommodation to neutral with unambiguous focus on a durable alignment of inflation with the target, while supporting growth.

The MPC decision did not come as a surprise, given the resilient growth environment and inflationary risks emanating from geopolitical escalations and erratic weather conditions.

The MPC noted that—

(a)   The global economy has remained resilient and is expected to maintain stable momentum over the rest of the year, amidst downside risks from intensifying geopolitical conflicts.

(b)   The domestic growth outlook remains resilient supported by domestic drivers – private consumption and investment. Real GDP registered a growth of 6.7% in Q1:2024-25, driven by private consumption and investment. Looking ahead, the agriculture sector is expected to perform well on the back of above normal rainfall and robust reservoir levels, while manufacturing and services activities remain steady. On the demand side, healthy kharif sowing, coupled with sustained momentum in consumer spending in the festival season, augur well for private consumption. Consumer and business confidence have improved. The investment outlook is supported by resilient non-food bank credit growth, elevated capacity utilization, healthy balance sheets of banks and corporates, and the government’s continued thrust on infrastructure spending.

(c)   The progress of ‘disinflation’ is still incomplete. Headline inflation declined sharply to 3.6 and 3.7% in July and August respectively from 5.1% in June. Going forward, the September inflation print may see a significant pick-up as base effects turn adverse and food prices register an upturn. Recent upturn in key commodity prices, especially metals and crude oil needs to be closely monitored. Risks stem from uncertainties relating to heightened global geo-political risks, financial market volatility, adverse weather events and the recent uptick in global food and metal prices. Hence, the MPC has to remain vigilant of the evolving inflation outlook.

The MPC policy statement sounds to me as follows:

The resilience of growth and incomplete mission to tame inflation does not warrant an immediate policy rate cut. The upside risk to inflation, especially geopolitics (middle east escalation) and climate (LaNina impacting Rabi crop) are material and need to be provided for adequately. Besides, the evidence suggesting that the present policy rates are restricting growth is insufficient. A rate cut now could waste the whole effort made since February 2023. We are changing the policy stance to a ‘heavily guarded neutral’ just to secure an optionality to cut rates, mostly to keep the market participants engaged. December 6, 2024 rate cut is not on the table as of now. A pre-budget February 2025 cut discussion might take place, but the decision would be influenced by the need to protect INR rather than stimulating growth. 

For records the MPC projected—

• CPI inflation for 2024-25 at 4.5% with Q2 at 4.1%; Q3 at 4.8%; and Q4 at 4.2%. CPI inflation for Q1:2025-26 is projected at 4.3%; with the risks evenly balanced.
• Real GDP growth for 2024-25 unchanged at 7.2% with Q2 lower at 7.0%; Q3 higher 7.4%; and Q4 unchanged at 7.4%. Real GDP growth for Q1:2025-26 is projected at 7.3%, with the risks evenly balanced.