Dear Reader,
The market sprinted to new all-time highs on Friday, riding on the excellent GDP numbers. The third quarter’s GDP growth of 8.4 percent was far beyond expectations, as was the estimate of 7.6 percent growth for the full year 2023-24. After all the revisions and re-revisions, the new estimate of GDP growth at constant prices for 2023-24 is 0.6 percent higher than in the earlier projection, while the new estimate of GVA growth is 0.3 percent higher than the earlier forecast.
The reason for the market euphoria is that this extraordinary performance has come about at a time when global growth is sluggish, monetary policy has been tightened, policy rates are high, globalisation is on the back foot, and geopolitical conflicts are increasing. Consider that in the December quarter of 2019, before the pandemic, GDP growth was just 3.26 percent. We’ve come a long way since then.
The big difference between 2019-20 and 2023-24 lies in the increase in capital formation. Gross fixed capital formation was up 10.6 percent in Q3, 2023-24, while it was -1.7 percent in Q3, 2018-19. Indian banks and companies have cleaned up their balance sheets and reduced leverage. But the key role in increasing capex was played by the government and the household sector. The government’s new estimates of savings and capital formation show that the share of the corporate sector in capital formation fell between 2018-19 and 2022-23, primarily because of lower capex by public non-financial corporations. On the other hand, the shares of both the government and the household sectors in capital formation have gone up. The capex push by the household sector is visible in new housing sprouting across cities.
While the government seized the initiative by prioritising capex, it was able to do so by increasing its fiscal deficits and its debt. Thankfully, though, it hasn’t led to inflation, because of the ongoing deflation in China. The Bloomberg Commodity index is at its lowest since December 2021.
True, the new GDP data imply a sudden fall in growth in the fourth quarter of 2023-24. The unspoken assumption by everybody seems to be it’s a statistical quirk that will soon be remedied.
It’s also true that consumption is weak. But then, China had double digit growth rates in spite of low consumption growth for years. What India needs now is not consumption-based growth, but more investment. If we can have 8.4 percent GDP growth with weak consumption, let’s have more of the same. No country has ever consumed its way to greatness.
But everything depends on how sustainable the growth numbers are. Here’s a contrarian take: Real GVA growth has been steadily decelerating, from 8.2 percent in Q1, 2023-24 to 7.7 percent in Q2 to 6.5 percent in Q3 and an implied 5.4 percent in Q4.
On the other hand, all the indications are that growth will get several tailwinds. First, global growth is stabilising. Second, rural demand should get better if agriculture rebounds in 2024-25. Third, the much-awaited increase in corporate capex will happen soon. Fourth, inflation coming down should boost consumption. Finally, and most importantly, as Jayanth Varma said in the last MPC meeting, ‘’there is no evidence at all that the economy is overheating’’, which means the upcycle is just beginning.
Proof that the manufacturing sector continues to expand robustly came from the PMI numbers for February, which beat even the flash estimates. The survey said, ‘’ India’s manufacturing sector approached the end of the current fiscal year with a further pick-up in growth in February, according to the HSBC India PMI. Production rose at the fastest pace in five months, fuelled the quickest increase in sales since last September and the strongest expansion in new export orders for 21 months.’’ It added, ‘’The upturn in manufacturing output was the strongest seen for five months and led by the capital goods category.’’ At the same time, both input and output price inflation were weak.
All this is great news for the markets and provides a fundamental basis to its bullishness. To be sure, in the short-term markets overshoot. The market regulator is concerned about signs of irrational exuberance in small caps and the regulatory spotlight on these stocks is justified. And as Ruchir Sharma wrote in this FT piece, free to read for MC Pro subscribers, "For a country that has long disappointed both the optimists and the pessimists, the bar of expectations is now very high."
But with the manufacturing push, the spate of reforms and the very likely continuation of a business-friendly government, all the signs are lining up in India’s favour and the markets are reflecting that. The party being celebrated in the markets is India’s coming out party. In the immortal words of Diana Ross in, "I'm coming out":
‘’The time has come for me to break out of this shell
I have to shout that I am coming out…”
Cheers,
Manas Chakravarty
Note: The Pro Panorama edition dated Friday, March 1 had an error in the absolute GDP figures mentioned. It should be read as: "After all the revisions, GDP at constant prices for 2023-24 is now pegged at Rs 173 lakh crore, compared to Rs 172 lakh crore in the first advance estimates."
Here are some of the other stories and insights we published this week, in case you missed them, apart from our technical picks in the equity, commodity and forex markets:
Stocks
Which stock is best suited to play the robust growth in MF assets? Muthoot Finance, Crompton Consumer, Avalon and Elin: are these EMS players worthy of investor attention? Exicom IPO, Power Grid Corporation, Vijaya Diagnostic Centre, Sundaram Finance, Indian Hotels, What explains the huge stock underperformance of Star Health Insurance? Sagar Cements, Manappuram Finance, NTPC, Gabriel, Why this jewellery maker is set to glitter, Balaji Amines—is a turnaround imminent? Bharat Dynamics
Markets
Valuation of small cap stocks indicates correction
The compelling case for investing in REITs
Why India’s consumption expenditure data should cheer investors
Has Berkshire Hathaway become too big to grow?
GuruSpeak| Anjeneya Manoj Kumar’s secret to trading Big Boy Covered Calls
Whirlpool cashing out at juicy valuation in India unit a one-off instance, or an MNC trend?
Trading mindfully for success, Michael Phelps style
Invoking sixth sense in business and investing
Financial Times
Can European carmakers stop China’s electric behemoth BYD?
Oil and gas profits triple under Joe Biden
Traders amass big bet on falling grain prices after bumper harvests
Why investors should be wary of 'mergers of equals'
Companies and sectors
Why IT stocks are rallying despite layoffs
What a steep hike in sugarcane FRP means for sugar mills and investors
The billion dollar drug market that is powering pharma stocks
P&W engine woes, lower passenger yields may clip Indigo's wings in the near term
Share of PSB profits in total banking sector vaults
Surprise slump in iron ore prices poses risk for India’s steel producers
Novelis IPO marks Hindalco’s evolution into a global metals giant
Personal Finance
Should you invest in Sachin Bansal’s Navi Finserv NCD issue offering up to 11.19%?
Credit Card Alert: here are the charges you should be aware of
Pre-owned luxury cars and insurance: How to mix ideal coverage with affordability
Economy and policy
The secret behind premiumisation, revealed by the Household Consumer Expenditure Survey
Decoding who consumes how much
A profile of the seriously weird average Indian consumer, from the Household Consumer Expenditure Survey
India’s electricity demand set to outpace China and world
Are farmers reluctant to diversify beyond paddy and wheat?
Inside Edge
Fund managers drive hard bargain in Swan QIP, new tycoon on the block, swarm of HNIs, take it or leave it say merchant bankers
Kernex’s lofty guidance finds few takers, HNIs call Indus right, Thalapathy bets big on NIBE
Desi Soros flogs HFCL, operators shift tack in low float PSUs, algo fest in Sundaram Multi, fallen IT angel back in spotlight
Tech & startups
Paytm Payments Bank board rejig unlikely to sway RBI
Byju’s governance failures should force a regulatory overhaul of the startup ecosystem
Can India be at the forefront of AI technology?
Geopolitics and geoeconomics
The Eastern Window: Putin set to get re-elected as sanctions fail to damage Russia
India can learn from Japan’s speed in setting up semiconductor facilities
China’s trade tentacles run deep, making decoupling a pipe dream
Politics
How badly will Sandeshkhali hurt Mamata Banerjee in the upcoming elections?
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