Vijay Kumar Gaba

 One of the most common narratives in all the investment advisory pitches is the impact of inflation on investors’ wealth. Inflation is often termed as termite that silently destroys investors’ wealth. Protecting wealth from inflation is therefore one of the primary objectives of almost every investment strategy.

Over the weekend I examined more than twenty-five investment proposals, mostly focusing on elevated inflation and its impact on real returns. The common advice is to take higher risk by increasing the proportion of high yielding debt and equities.

Discussions with investment advisors indicate the investment strategies aimed at protecting the real (inflation adjusted) value of the investors’ portfolios may be based on poor, and often wrong, understanding of the impact of inflation on investors. Most of them presented the official data of inflation and suggested investment products that may yield a return that is higher than the official CPI (Consumer Price Index) inflation.

None of the 20 odd investment advisors I spoke with has considered that inflation is a very personal phenomenon. Every investor may have a different inflation number to deal with. The official CPI inflation may be of little relevance for a majority of household investors. The inflation affects rural and urban investors differently. The inflation also varies according to the State, an investor lives in and incurs most of the expenditure. The impact of inflation on investors’ wealth could be different depending on his consumption pattern and saving propensity.

·         The inflation rates for various states are different. In March 2023, West Bengal CPI inflation was just 4%, as compared to national average of well over 5% and Tamil Nadu inflation of 7%. Investment strategy for investors living in Kolkata and Chennai need to account for this difference.

·         The weightage of different states in calculation of CPI is also different. Maharashtra has a weightage of 13% (8% rural and 19% urban) in overall CPI basket; while Bihar has a weightage of 5%. Obviously, the investors in Patna and Mumbai face different inflationary impact; and their investment strategies to fight inflation need to be different.

·         The weightage of food and beverages in rural CPI basket is 54%, while in urban basket it is 36%. The combined basket has a weight of 46% for food. Obviously, food inflation impacts rural and urban investors differently. Rural basket has 3% weightage for Pan, tobacco and other intoxicants while urban basket has a weight of 1% for this. Similarly, the weightage of education, health and dairy consumption also varies sharply for rural and urban consumers.

·         The official CPI basket does not account for the inflation in housing and rental cost, which could be a significant expenditure for many investors, especially in urban areas.

·         One of the most important aspects of inflation consideration in investment strategy should be the saving propensity of the investor. An investor which is able to save 60-70% of his income cannot be put n the same bracket as an investor who saves just 10-20% of his income.

·         The investors who have significant debt and use most of their savings to repay the debt may have a self-neutralizing inflation. Similarly, an investor engaged in a money lending business might be much more severely impacted by inflation than investors who have significant borrowing.

·         A 70yr old investor with independent children, who consumes less cereals, education and transportation and more healthcare will have very different inflation impact as compared to a 40yr old investor with school going children and dependent aged parents will have remarkably different consumption basket and therefore inflation impact.

The point is that the impact of inflation is usually different for various investors depending on their individual circumstances and status. Therefore, investment strategy needs to be personalized for all investors, or at least class of investors. Selling the fear of inflation and making them invest in products which are benchmarked to official CPI may not serve much useful purpose for most of them.

Investors also need to understand their inflation profile and accordingly adjust their investment strategy.

         

Seven reasons to expect faster disinflation (Nomura Securities)

... driven by softer momentum and not just base effects. Most Asian central banks are

now on a pause, and the window to easing should open up later this year.

By mid-2023, we expect inflation momentum (m-o-m, seasonally adjusted) to be closer to central bank targets in most economies. This means most Asian central banks are now in a policy pause phase and, if underlying inflation moderates durably, as we expect, the window to easing would open up later in 2023.

#1. Asia’s inflation is driven more by supply than demand-side factors Asia’s inflation differs from inflation in the US/Europe, as it is more supply-side driven, and these drivers are gradually abating. Oil prices are around one-third lower than almost a year ago. FAO food prices have fallen for eleven consecutive months, and this has historically transmitted to Asia’s food inflation with a lag of around six months. Pandemic-driven supply-chain disruptions have fully normalised. Currency depreciation pressures have abated. The full impact of these easing supply-side pressures has yet to reflect in Asia’s inflation. That said, risks remain. There are upside risks to food inflation, such as climate change and El Niño (associated with less rainfall in Asia). Geopolitical risks are a threat. Lagged adjustments to utility prices or the removal of subsidies are also risks, although amid slow growth, we expect any such tweaks to be delayed into 2024.

#2. Base effects: The role of base effects in lowering headline inflation is well recognized. For instance, assuming unchanged monthly momentum, base effects alone could moderate percentage year-on-year headline inflation from current levels by 5.9pp by year-end in Singapore, 4.9pp in the Philippines and 2.9pp in Korea.

#3. Easing food/energy prices should lower headline and core inflation: Food and fuel have dominant weights in the consumption basket in EM Asia. They drive headline inflation, play important roles in expectations formation and often spill into core inflation, due to second-round effects. This is a key reason why policymakers pre-emptively use supply-side and fiscal measures to limit the pass-through from high food/energy prices to consumers. Now playing out in the reverse direction, the moderation of food/energy price pressures should lower headline inflation and curtail household inflation expectations, while also easing (sticky) core inflationary pressures.

#4. No wage-price spiral in Asia: Labour markets in Asia are less flexible, so the post-pandemic frictions caused by mass layoffs and early retirements (as seen in the US) are less of an issue. Countries like Singapore and Malaysia that are dependent upon migrant workers have already addressed the supply mismatch. Asia also continues to experience labour market slack, as a more restrained post-pandemic fiscal response has resulted in a more gradual demand recovery.

#5 Goods disinflation: Pipeline price pressures have eased materially across Asia, with falling import prices, lower PPI inflation and a moderation in the PMI input price index. Manufacturing firms used the past two quarters of lower input costs to recoup their margins; however, with weaker goods demand and subdued input cost pressures, we expect faster core goods disinflation.

#6 Services inflation is likely to moderate: Services catchup in Asia is largely complete and as wage growth moderates, this should have a salutary impact on services inflation. In countries where consumption is at a greater risk of slowing due to restrictive domestic monetary policy (e.g., South Korea), we expect services inflation to slow more rapidly. Housing rental inflation remains elevated, but higher interest rates are slowing residential property price growth, which will likely feed through to rental inflation, albeit with a lag. That said, our view is that services inflation in Asia is likely to moderate, rather than collapse, since domestic monetary conditions are broadly neutral.

#7. China is unlikely to be a source of inflation: China’s growth cycle is desynchronized from the rest of the world, but we do not view China as a material source of inflation risk, either to itself or globally. China’s growth rebound since its re-opening has underwhelmed in the cyclical segments like autos and property, and lacklustre export growth remains a challenge. With lower consumer confidence, weak income and job prospects, our China economics team expects the release of China’s pent-up consumption demand to disappoint market expectations, at a time when its policy stance is still one of support, but with restraint. For the rest of Asia, China’s services-led rebound is likely to have limited growth spillover effects on goods demand (which is what matters for Asian exports). Moreover, weak demand from US/Europe amid high uncertainty is likely to more than offset any positive spillovers from China reopening. In our view, the decision by OPEC+ to cut oil production, despite China’s reopening, suggests underlying demand is much weaker than broadly believed.

Q4FY23 Preview (Elara Capital)

We expect Q4FY23E Nifty50 sales to increase ~13% YoY and ~5% QoQ. Sequentially, we see an 81bp expansion in Nifty EBITDA margin (ex-financials) and a 71bp expansion in Nifty PAT margin (ex-Axis Bank due to one-offs following merger of the Citi portfolio), driven by overall lower raw material cost and easing off of commodity prices. We expect Nifty EBITDA (ex-financials) to grow at 9% QoQ and Nifty earnings to grow by ~3% QoQ, owing to margin improvement. If we were to consider one-off effect of Axis Bank-Citi merger, we expect Nifty earnings to post healthy 11% QoQ and 17% YoY growth.

Commodities, led by metals, are expected to post the highest YoY decline in earnings on lower prices and weak realization, while banks (ex-Axis Bank) are likely to grow by 33%, led by improving NIM and lower credit cost. Autos (ex-Tata Motors), fueled by raw material cost moderation, is expected to drive 32% YoY earnings growth.

We expect basic materials, led by metals, to erode 95% of Nifty’s incremental PAT YoY, implying materials will offset half of Nifty’s incremental profit, owing to lower realization and commodity prices. However, improved volume and recovery in steel prices since the past quarter means metals will add 95% to Nifty’s incremental PAT sequentially.

We see banks (ex-Axis Bank) contributing 72% to Nifty incremental YoY PAT, owing to sustained credit growth, improving NIM and lower credit cost, followed by energy, which would contribute 59% on improved marketing margin of oil marketing companies (OMC) and higher GRM of Reliance, due to Russia’s crude discount.

Overall, we expect financials and energy to contribute 131% to Nifty’s incremental YoY PAT. QoQ we see energy and materials contributing 216% to Nifty’s incremental QoQ PAT.

Despite geopolitical tensions, FII outflows, high inflation & interest rates, and the US-Europe banking crises in FY23, India remains resilient, with healthy corporate earnings in the first three quarters. In Q4FY23, financials are expected to dominate with improving net interest margin and lower credit cost. Double-digit growth is expected in consumption-oriented sectors, due to volume growth and softer raw material cost despite subdued demand in rural areas. The metals sector also is likely to recover sequentially, following removal of exports duties and easing off of COVID-19 related curbs in China. As the interest rate cycle peaks, macroeconomic tailwinds are expected to support earnings growth, even as global demand-led growth may falter.

India Autos: Staying Constructive (Jefferies Equity Research)

We remain positive on Indian autos with the sector in midst of strong earnings cycle. We see healthy 11-18% volume CAGR for PVs, 2Ws and trucks over FY23-25E, with 2W growth outpacing 4W. Strong top-line growth and better margins should fuel double-digit EPS CAGR for most OEMs.

2W growth to outpace 4Ws over FY24-25: India's auto demand, after suffering its worst downturn in decades, appears poised for continued double-digit growth in FY24-25. Two-wheelers (2Ws) have lagged in recovery but the abnormal 35% fall over FY19-22 created a very favorable base for the segment that is core to personal mobility; we believe 2Ws are ripe for a replacement cycle too. We see 2Ws outpacing 4Ws with 18% CAGR over FY23-25E (FY23E:+19%). While PVs (passenger vehicles) have witnessed some demand moderation in recent months, we see tailwinds from low penetration, aging vehicles-in-use, and reverse shift from shared to personal mobility, driving 11% CAGR over FY23-25E (FY23E: +26%). Trucks have entered the third year of up-cycle, and we expect 12% CAGR over FY23-25E (FY23E: +39%). Tractors, conversely, are at risk of a downturn, and we expect 15% fall in FY24E (FY23E: +12%).

Improving margin trajectory: Weak demand and a severe metal price rally weighed on auto OEM margins in the last 2-3 years. Steel (Indian HRC flat) and aluminum prices doubled over mid-2020 to Apr-2022, but then corrected 27-32% by Dec-2022, led by weakening China macro and tightening interest rates elsewhere. With China showing signs of cyclical recovery, metal prices are likely to have bottomed out; however, we believe the intensity of any potential price increase is unlikely to be similar to 2020-22. We expect 1-4ppt EBITDA margin expansion for most of our covered auto OEMs over FY23-25E, led by better pricing power amid good demand, and operating leverage benefit.

TVSL and TTMT strengthening EV franchise: The sharp increase in govt incentives, along with new product launches, has resulted in share of EVs in 2Ws rising from just 0.4% in FY21 to 5% in Mar-Q; we expect 10% by FY25. TVS has risen to #2 position in E2Ws in recent months; with its market share in E2Ws approaching that in ICE scooters, TVS is turning the electrification risk into an opportunity. While EV adoption in PVs is slower (2% of industry in Mar-Q), Tata is leading, with EVs forming 15% of its India PV volumes in Mar, and we believe it will benefit from rising EV adoption.

Valuations attractive; still time to Buy: We remain positive on Indian autos, with the sector in a positive demand and margin, and hence earnings, cycle. Most stocks are trading near or below their respective last 10-year average PE on our FY24 estimates; we find this attractive in the context of a strong earning cycle. We have fine-tuned FY24-25E EPS estimates for our coverage within +/-4% range.

Infrastructure: Stable awarding; calibrated aggression (HDFC Securities)

The NHAI had set a target of awarding 6,500 km in FY23, of which it awarded ~3,750 Km (vs. 6,306 Km in FY22) at an NHAI cost of INR 1trn. Ordering seems to have spilt over to FY24 with our checks suggesting ~INR 350bn of bids expected to be awarded during early H1FY24. During the year, HAM continued to be its preferred mode of awarding with 75/31/3 projects awarded on HAM/EPC/another basis. Competitive intensity reduced towards the FY23 end as developers maintained calibrated aggression. Non-road players outperformed their inflow guidance, while road players need to catch up on missed guidance.

Reduction in competition intensity: The competition intensity cooled off with the top-6 listed players placing their bids at an average of 14.3% over and above the NHAI cost vs. a 6.5% discount in FY22. Similarly, the top-6 unlisted players’ bids were at a 4.8% premium over the NHAI cost vs. a 2.9% discount in FY22. Further, HAM projects were bid at an average premium of 6.7/4.4/2.8/5.6% in Q1/Q2/Q3/Q4FY23. However, EPC projects continued to be bid at an average discount of 5.4/22.2/21.4/28.7% in Q1/Q2/Q3/Q4FY23. Out of the total 109 projects awarded during the year, 38 projects worth INR 361bn were awarded at an L1 cost of INR 418bn i.e. an average premium of 16% over the NHAI cost whereas, 71 projects worth INR 683bn were awarded at an L1 cost of INR 573bn i.e. an average discount of 16% over the NHAI cost.

FY23 order inflows; very few companies surpass/meet their FY23 guidance: Out of the coverage universe, companies like LT, Ahlu, ASBL, DBL, HG Infra, KEC, and KPTL have either surpassed or met or marginally missed their FY23 order inflow (OI) guidance. Companies like JKIL, PNC, and KNR have not even achieved 50% of their FY23 OI guidance. This is more a function of broad-based ordering beyond roads and well-diversified companies benefitting from the same.

Power T&D, Railways, Metro, Water, O&G, Hydrocarbon, and Building EPC witnessed robust ordering. Pickup in export orders aided inflows for the EPC companies like LT, KEC and Kalpataru. We expect a pickup in domestic power grid awards for capital goods and railways and private capex pickup shall aid strong inflows.

Valuation remains supportive: Tier-1 infrastructure companies are trading at ~9.5x FY25E EPS. We expect the competitive intensity to reduce further. Infrastructure asset creation is the top priority, which may lead to robust ordering.

Personal Loans Cross Rs 40 L cr in Feb; Industry Growth Moderates (CARE Ratings)

Gross bank credit offtake rose by a robust 15.5% year on year (y-o-y) in February 2023 due to strong growth across all the sectors, especially in the Non-Banking Financial Companies (NBFCs), and unsecured personal loans segments.

Personal loans growth accelerated to 20.4% y-o-y in February 2023 from 12.5% a year-ago period, driven by other personal loans, credit cards, housing and vehicle loans.

Credit growth for the services was robust at 20.7% y-o-y in February 2023 as compared with 6.2% a year-ago period due to growth in NBFCs and retail trade.

Industry credit offtake growth moderated at 7.0% (compared over the last couple of months), registering a lower growth compared to personal loans and services. Infrastructure witnessed a 0.6% growth due to slow growth in the power sector and a decline in the telecom sector and railways.

Housing loans (share of 47.6% within personal loans) grew by 15.0% y-o-y in February 2023 compared with 13.1% in the year-ago period. In spite of reporting healthy growth in the month, the share of housing loans dropped to 47.6% in the personal loans segment as of February 24, 2023, vs. 49.8% over a year ago as unsecured loans grew at a faster pace.

Unsecured loans reported a robust growth of 26.3% y-o-y in February 2023 due to the miniaturization of credit, digitalization of loans (faster loan turnaround and easier process), and preferences for premium consumer products. Its share increased to 32.5% in the personal loans segment as of February 24, 2023, vs. 30.9%% over a year ago. After housing, unsecured loans are the second biggest component in the personal loan segments.

Given the strong demand for different retail loan verticals, we anticipate retail credit growth to remain in the high digit for FY24.

Vehicle loans (a share of 12.4% within personal loans) registered a robust growth of 23.4% y-o-y in February 2023 as compared to 10.0% in the year-ago period. Outstanding for vehicle loans stood at Rs.4.96 lakh crore on February 24, 2022. Nonetheless, it declined by 0.1% over January 2023, witnessing a drop after 20 months. 

The opening sequence of the classic Ron Livingston starer “Office Space” (1999, Mike Judge), succinctly depicts the popular saying – “the other queue always moves faster”. I always remember this sequence when I see motorists trying a variety of tricks to change lanes at toll plazas on Indian highways. The drivers display daring skills to exit lanes, make lateral moves towards other lanes, mostly blocking the movement in both the lanes and causing an instant commotion – honking and showering of expletives. The show is quite entertaining, if you are not in a rush; else it is annoying and dismaying at the same time.

As a regular driver on the highways and expressways, I can vouch that the system of toll collection still needs tremendous improvement – both in terms of operations as well as the method. Inefficient operations and faulty methods have nullified significant part of the benefits of infrastructure upgrade and Fastag payments. Many highway users have also expressed their dissatisfaction over frequent avoidable delays at toll plazas.

Travelling across the states of Madhya Pradesh, Punjab, Haryana, and Himachal Pradesh in the past one month, I have observed the following problems at various toll plazas at expressways, national highways and state highways.

Operations

1     Faulty equipment: This is probably the most common problem faced by road users. The scanners or readers installed at toll plazas are often faulty and they are not able to read the Fastag promptly. In most cases vehicles have to stop for longer, move back and forth so that the scanner camera could detect the Fastag. In many cases, the toll staff use hand held cameras and scan each Fastag manually.

2.    Dispute over exemption: It is common to experience people having a lengthy argument with the toll staff over their eligibility for exemption from toll payment. Usually there is no manager available to make a decision. The poor toll clerk has to bear the unruly behavior and threats. There is no mechanism to pull the disputing vehicles on side. They block the toll lane while arguing with the clerk; while the long queue builds up behind them.

Of course, I am not mentioning the quintessential argumentative Indian who make it a case of showing their privilege by insisting on not paying the toll.

3.    Change shortages: After implementation of mandatory Fastag payments, the cash collection at toll plazas has reduced materially. In cases where the Fastags are invalid or not available, the road users need to pay cash. Given that toll amounts are often in odd figures, returning change takes a long time. Payment using UPI is a solution, but unstable/unavailable networks, PoS not working etc. are common issues.

4.    Hawkers and beggars are becoming a common nuisance on all busy toll plazas.

5.    Heavy commercial vehicles (Trucks and buses) often do not adhere to the lanes marked for them at toll plazas. It is common to see overloaded trucks getting stuck in narrow lanes; or a bus taking too long to settle the toll payment.

Also, the 3-4 lane roads suddenly widen to 10-12 lanes at toll plazas. The rules for choosing toll plaza lanes are not defined. The drivers are often seen crisscrossing the road, attempting to enter the least crowded lane.

6.    Public utilities: Most of the newly constructed highways lack basic public utilities like drinking water and toilets. While driving through over 1000kms of highways in five states, I did not find a single public toilet or drinking water facility built by the road operator. In many cases like KMP, there is even no privately run facility. Considering that India has the distinction of being the diabetic capital of the world, not having a public urinal for hundreds of kilometers is a case of criminal negligence.

Methods

1.    In case of brownfield projects (widening of highways), it is common to see that toll collection starts almost immediately with the commencement of work. The contractors are mostly insensitive to the inconvenience caused to the commuters. They blatantly violate the terms of the contract and climate control norms. The service roads or unpaved narrow passages provided for commuters are pathetic, especially when the commuters are being forced to pay high toll amounts.

2.    The toll collection continues even when the operator does not maintain the road as per the prescribed standards. A 50km drive on the prestigious KMP Expressway on the outskirts of Delhi, would show how the commuters are being forced to pay a toll charge of over Rs2/km for driving on a very poor quality and extremely dangerous road. There are frequent accidents purely due to poor quality of the road and bad management (illegal intrusions, wrong side driving etc.).

3.    Toll charges are frequently hiked, apparently to adjust for the higher inflation. There are numerous cases of toll charges continuing even after expiry of the original concession period.

It is pertinent to note that taxpayers are already paying double tax for using highways. Every motorist pays highway cess on each liter of fuel purchased, for construction of highways. They also pay toll charges while the roads are under construction, sometimes for 4-5years. Over and above, they pay toll charges for using the roads when it is completed. The users need to be treated with respect and a certain degree of sensitiveness, not like slaves as is the case presently.

The NHAI must consider extending the toll collection period instead of hiking toll rates, just like the banks are raising loan tenure instead of hiking EMI amount in case of interest rate hikes.

Also see

Exploring India – Part 1

Exploring India – Part 2

Exploring India – Part 3     

 Exploring India – Part 3

In the past couple of weeks, we travelled to the states of Punjab, Himachal Pradesh (HP) and Haryana. In our nine days of travelling, we covered ten districts of Punjab spread across three divisions, viz., Jalandhar, Rupnagar and Patiala; six districts of HP spread across two divisions, viz., Mandi and Shimla; and eight districts of Haryana spread across five divisions, viz., Gurugram, Rohtak, Hissar, Karnal, and Ambala.

It is pertinent to note that these three states in the present form came into existence in November 1966, after enactment of the Punjab Reorganization Act 1966. Through this act, the erstwhile province of East Punjab was divided into largely Punjabi speaking state of Punjab and largely non-Punjabi speaking state of Haryana. Some areas of East Punjab were transferred to the union territory of Himachal Pradesh, and it was granted a full state status. The city of Chandigarh also became a union territory, serving as temporary capital of Punjab and Haryana. The division of East Punjab was a consequence of the Punjab Suba Movement led by the Shiromani Akali Dal.

Many historians find roots of the Punjabi Suba Movement in the demand for a separate country for Sikhs during pre-partition days. The Punjab Reorganization Act did not satisfy the Punjab leaders who were now insisting on a constitutional autonomous state.

A highly violent movement for an autonomous Sikh state took place in the 1980s; killing several thousand innocent civilians; invasion of the sacred Golden temple by Indian army to flush out the separatists hiding there; followed by gruesome murder of the then prime minister Mrs. Indira Gandhi. A small section of the majority Sikh population still continues to agitate for autonomy. The reorganization left many issues unresolved, which continue to affect the relations between Haryana and Punjab to date.

I may now share some observations made during the trip.

Socio-economic assessment

·         Haryana is making significant progress in the area of gender equality.

·         The obsession with overseas migration is catching up fast in HP and Haryana. The immigration consultants and IELTS coaching centers are mushrooming in many smaller towns. Canada and Australia are the most favorite destinations for the aspiring immigrants.

·         Both Haryana and HP are witnessing a significant surge in the number of students aspiring for medical and engineering courses. JEE and NEET coaching centers are visible in every town.

·         Farmers in all three states appeared stressed due to unusual weather conditions. It was unusually wet and cold for the month of April. We witnessed good snow in HP. Rains, hailstorm and snow damaged the standing and harvested wheat crop; apple flowers and vegetables. For wheat crop, the margins of many farmers could be materially lower despite higher crop; since the cost of harvesting could be higher and realization poor. The market price is reportedly lower than MSP and FCI is not procuring normal quantity.

·         Small industries in Punjab and Haryana appear to be recovering from the Covid led slowdown, but expect a long road to normalcy. Many micro unit owners indicated that significant investment might be needed to reach the pre Covid level of profitability. A decent number of SME unit operators indicated that the relaxation in credit parameters as part of Covid stimulus packages has helped them significantly in sustaining, upgrading and advancing.

·         The tourist services (guides, transports etc.) are mostly unregulated and malpractices are rampant. In popular places like Manali, Shimla etc., it appears as if a mafia is firmly in control.

·         The infrastructure has improved materially over the years; but the administration remains insensitive to the plight of tourists.

·         In Punjab we could see a Gurudwara, on an average, every five kilometers. Many of these Gurudwaras have been constructed in the past few decades. But in the neighboring Haryana and HP, which have significant Punjabi population, few new Gurudwaras seem to have been constructed in post 1966.

General observations

We made some observations during our trip, which may be true for most of the country. These are important since these highlight the changing behavioral patterns in our society.

·         The construction in the hill state of Himachal Pradesh may be ignoring sustainability concerns, not learning anything from the neighboring Uttarakhand which is facing fury of nature for pursuing unsustainable development. Cloud bursts, stone falling, and landslides may become more common in HP in a few years.

·         Traditionally, on highways the truck drivers were considered to be the most efficient and innocent users of the road. They would drive slow and mostly in the left or middle lane; never overtake; and mostly avoid driving side by side. This paradigm seems to have completely changed. A significant proportion of truck drivers are now the most ill-trained and risky drivers. They overspeed; drive rashly; frequently overtake; and drive side by side blocking two or more lanes forcing the car drivers coming from behind to take undue risk and overtake them dangerously. This practice could be seen even in hills.

Apparently, a large number of less trained or untrained drivers have entered the truck driving profession. Interaction with some older drivers indicate that the fleet owners may be compromising on the quality of drivers to save wage cost. Another reason is that the pressure on drivers to meet tighter timelines has increased. Besides, there could be unreasonable resetting of delivery schedules accounting for time saving due to Fastag, GST and better roads.

·         Motorcycle has been one of the major traffic nuisances in most parts of the country. In the hill state of Himachal Pradesh, small passenger cars (especially Maruti Alto) have emerged as a serious challenger to motorcycles. Most local taxis are now small cars. Besides, a large number of households own small cars. Rash driving and irregular parking are common problems. In Punjab two-wheeler drivers usually do not wear helmets. They driving on expressways and highways are a major safety hazard for all road users.

·         Motorcycles and small cars are a significant component of households’ occupational necessities; Public transport in non-metro towns, cities and villages is not showing significant improvement; and the affordability quotient of lower middle-class households has improved. The demand for personal vehicles, especially small cars may therefore sustain.

·         The construction practices of NHAI contractors are worsening. They are totally insensitive to the convenience of the users who use the road while the construction is continuing. They blatantly violate the safeguard and obligations provided in their contracts; seldom care about the pollution control norms; do not follow safe practices for their workers and road users. The worst part is that the road construction quality is below par in most cases.

Political assessment

·         Himachal Pradesh people appear satisfied with the recently elected Congress government. The incumbent chief minister is not doing anything to disturb the status quo and continuing with the extant practices, schemes and programs.

·         The Punjab population appears to be vertically divided in their opinion about the incumbent government. Large farmers, SME operators, students and public servants are disenchanted with the government, while laborers, artisans, small farmers and government contractors appear happy. The state has always been divided on caste lines. The abyss may be widening further. Law & Order is becoming a core issue with people. Many people complained about the rise in corruption, citing that the incumbent government may be losing control over lower bureaucracy and law & order enforcement machinery.

·         The Haryana population is also divided in their opinion about the incumbent government. Traditional Jat voters, especially women, who had supported the incumbent BJP government in past two elections, seem to be disenchanted and looking to return to Congress. INLD and its various offshoots, AAP, BSP etc however are not in much favor.

The perception about the incumbent government’s performance is mixed. It is scoring well on corruption parameters; while on execution it is scoring poorly.

·         The visibility of Prime Minister Modi in public spaces is very poor in HP and Punjab.

·         In 2019 Lok Sabha elections, BJP secured 16/27 seats, while Congress secured 8/27 seats in these three states. If Lok Sabha elections are held today, in my view, BJP might secure 10-13 seats, with Congress taking 8-10 seats.         

Also see

Exploring India – Part 1

Exploring India – Part 2

After two years of disruptions, uncertainty and volatility, FY23 appeared a rather normal year. Both the markets and the economy regained a semblance of normalcy in terms of the level of activity, trajectory of growth, direction, and future outlook. Though, it would be inappropriate to say that skies are blue and bright; it can be reasonably stated that we have reverted to a market that is no longer euphoric.

Pendulum swinging back to equilibrium

The global economy that witnessed two years of extreme pessimism followed by a period of steroid stimulated exuberance began to normalize in FY23. Central bankers began the process of normalizing monetary policies by withdrawing liquidity and hiking rates. The broken supply chains have been mostly restored. Inflated asset and commodity prices are returning to more reasonable levels. The organs of the global ecosystem which were infected badly by the excessive liquidity, irrational exuberance and unsustainable stress are now getting amputated. For example, we have already witnessed in FY23—

·         A large number of tech startups built on unrealistic assumptions and traded at astronomical valuations materially downsized, downgraded or weeded out of the system.

·         Energy and metal prices revert to pre Covid prices, commensurate with the economic activity.

·         The global shipping freight rates that had jumped to unsustainable levels have actually corrected back to below pre Covid levels.

·         Central bankers hiking rates from near zero levels to the highest levels in a decade.

·         Some financial institutions that thrived purely on easy liquidity, without forming a strong commercial base, facing the prospects of getting eliminated or downsizing.

The Russia-Ukraine conflict that dominated the headlines during the first half of 2022 has been mostly relegated to the inner pages of the newspapers. The energy and food grain markets that witnessed huge disruption due to the conflict have mostly normalized.

Following the law of physics, the pendulum may be swinging from one extreme to the other extreme in many cases. Of course it will settle in a state of equilibrium over the next couple of years.

Indian economy normalizing

Most spheres of the economic activity in India have recouped from the sharp decline due to the pandemic induced lockdown. Vehicle sales, mining, construction, travel, hospitality, cement and steel sales, power generation, freight movement, port activity etc. are all at or above pre Covid levels. The Indian economy is expected to grow ~6% in FY24, on a normalized FY23 base.

The bank credit growth that was languishing for almost five years has picked up. The financial sector has mostly recovered from the debilitating asset quality issues.

The capacity building, especially in the core infrastructure sector, is showing signs of accelerated growth. Many key infrastructure projects that have faced material delays, e.g., Dedicated Freight Corridors, are now closer to completion.

Market performance for FY23

For equity markets, FY23 was a year of consolidation. The benchmark Nifty50 yielded a marginally negative return (down 3%); whereas Nifty Midcap was mostly unchanged and Nifty Smallcap lost 14.5%. Thus, the abnormal gains made in the past couple of years have been normalized to some extent.

Some highlights of market performance in FY23 could be listed as follows:

·         Underperformers of the past three years, PSU Banks, FMCG and Auto sectors were the top outperformers for FY23; whereas Media, IT, Realty, Metals, Pharma and Energy sectors were notable underperformers.

·         For a period of 3yrs, Metals, Auto and IT are still the top performing sectors in the Indian markets.

·         Nifty50 yielded negative returns in 8 out of 12 months in FY23 – Jul '23 being the best month and Jun’23 being the worst month. A monthly SIP in Nifty50 during FY23 would have yielded a negative return of 2.1%.

·         India’s performance was mostly in line with the Asian peers like Indonesia, South Korea, Singapore, Japan etc. in local currency terms.

·         The market breadth was negative in 9 out of 12 months in FY23. Overall, the market breadth was negative.

INR weakened against USD & EUR

Despite challenges on macro (higher fiscal and current account deficit and inflation) INR remained mostly stable. It weakened ~8% against USD and ~6% against EUR, and was mostly unchanged against GBP and JPY.

RBI hiked aggressively, transmission pending

RBI hiked the policy rates aggressively from 4% at end of FY22 to the present 6.5%. However, the rate hikes have not been fully transmitted to the markets so far. The Average Base Rate of scheduled commercial banks has increased around 140bps from 7.25% - 8.8% to 8.65% -10.1%. Similarly the term deposit rates have increased from 5%-5.6% in March 2022 to the present 6%-7.25%. There is no change in savings deposits rate of 2.7% -3%.

Foreign investors remained net seller

Foreign portfolio investors (FPI) remained net sellers in Indian equities for the third consecutive year, selling over Rs626bn worth of equities in the secondary market.

The domestic institutions (DII) remained net buyers. With highest ever annual net buying of Rs251bn. DIIs were net buyers in 10 out of 2 months.

The net institutional flows (DII+FPI) in Indian markets were positive in 11 out of 12 months; even though the market yielded negative return in 9 out of 12 months in FY23.

Valuations more reasonable now

Nifty EPS is expected to grow ~15% in FY24, over and above a similar growth in FY22 and FY23. Negative in movement in FY23, has thus moderated the one year forward valuation of the benchmark Nifty50 closer to its long term average of 18x. Mid and smallcap valuations have also corrected accordingly.

The premium of Indian markets as compared to the global emerging market peers has also somewhat rationalized after the recent underperformance; though it still trades at a decent premium.