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Moneycontrol Pro Weekender: The elephant in the room

The well-crafted and well-delivered budget got many ‘wows’, but Mr Market’s worry lines are not yet gone

February 04, 2023 / 11:20 AM IST
That the Indian economy is in good shape is also seen from the latest PMI data, which pointed to another sharp expansion of private sector activity in January

That the Indian economy is in good shape is also seen from the latest PMI data, which pointed to another sharp expansion of private sector activity in January

Dear Reader,

The budget is the time when the government’s priorities become clear. That’s when we know which sectors it wants to support and where it would prefer to cut back. As the Austrian sociologist Rudolf Goldscheid said, “The budget is the skeleton of the state stripped of all misleading ideologies.”

What did the skeleton reveal on 1st February 2023? Mostly, it shows just one thing—an overwhelming emphasis on capex. The budgeted central government capex is 3.3 percent of GDP and 4.5 percent if we include the grants to the states for creation of capital assets. That is by far the highest capex spending by the central government in decades, although it used to be over 6 percent in the eighties. As this column points out, incremental government borrowing is essentially funding capex and as Nilesh Shah wrote, the priority is investment-led growth. To hammer the point home, we wrote on how the government is holding the capex baton, how infrastructure is firing on all cylinders and how the capex bazooka will boost GDP growth.

The hope, of course, is that it will crowd in private investment. This government has consistently held the view that private investment is the key to growth, a view lucidly enunciated in a chapter of the Economic Survey for 2018-19 titled ‘Shifting Gears: Private Investment as the Key Driver of Growth, Jobs, Exports and Demand’. It can scarcely get clearer than that.

It’s true that no nation has consumed its way to greatness. Economic growth is essentially a matter of capital accumulation, at least in the initial stages. All economies, regardless of ideology, irrespective of whether they are democratic or authoritarian, need to accumulate capital for growth. England did it through the enclosure of common lands. The imperial powers did it through pillaging their colonies. The Soviet Union expropriated the kulaks. Modern China does it by a thoroughgoing system of financial repression and by keeping the share of household consumption in GDP inordinately low.

The Asian economies that had growth spurts all had high levels of gross capital formation to GDP. In China, it has remained above 40 percent of GDP since 1993. South Korea’s peaked at above 40 percent in 1991, Japan’s was 43.5 percent in 1970, Thailand’s was 42.86 percent in 1995, Singapore’s was 46.9 percent in 1984 and Malaysia’s was 43.6 percent in 1995. You get the idea.

In contrast, India’s gross capital formation to GDP is estimated to be 31.7 percent in 2022-23, well below its peak of 39.8 percent in 2010-11. The Economic Survey of 2018-19 said, “The overwhelming evidence across the globe, especially from China and East Asia in recent times, is that high growth rates have only been sustained by a growth model driven by a virtuous cycle of savings, investment and exports catalysed and supported by a favourable demographic phase.” That is the model the Indian government is seeking to imitate.

But while the budget ticked all the right boxes for business and the markets, it soon gave way to despondency in the equity markets, because there’s an elephant in the room. Sentiment has been affected by the allegations levelled by short-seller Hindenburg Research against the Adani group. And in spite of the clear emphasis on capex in the budget, the BSE Infrastructure Index has sold off.

Markets across the world have been euphoric about the impending end of the rate hikes, amid signs of disinflation. The US Fed Fund futures are now predicting that the Fed will pause after one more rate hike of 25 basis points in March and there’ll be a rate cut by November. The US Dollar index has fallen sharply, fuelling a rally in emerging markets—the MSCI Emerging Markets index, as on 2nd February, is already up 9.3 percent this year. The Indian market, though, is struggling under the weight of the elephant.

Part of its underperformance is due to the relatively high valuations in the Indian market. With the opening up of the Chinese economy, foreign portfolio investors have made a beeline for that market.

But the allegations against the Adani group are also a reason for the market’s underperformance. We had pointed out that Indian banks have little to worry about as their exposure to the Adani group is limited. We said the Indian market’s fundamentals are sound and there is no reason to panic. That the Indian economy is in good shape is also seen from the latest PMI data, which pointed to another sharp expansion of private sector activity in January.

On Friday, the market seemed at last to be shaking off its worries. In view of the importance of the Adani group to Indian infrastructure, it’s important that it is able to put its troubles behind it as soon as possible and gain the support of investors. Perhaps the market regulator could play a more active role.

This song with the refrain, ‘So, what we gonna do/With this elephant in the room?’ best reflects the market’s mood at present.


Manas Chakravarty

Here are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets. We have picked only a few budget stories, as we have had the budget coming out of our ears all week.


Which life insurance stock should one consider, A trusted play on the economic upcycle, Ashok Leyland, Titan, Dabur India, SRF, Indian Hotels—robust demand in play, Sun Pharma, L&T—upbeat about the capex cycle, A tech stock to avoid, GAIL, Is the worst over for Laurus Labs? Best proxy to ride the EV mega trend, Vedanta, Apcotex, Seshasayee Papers, Bharat Electronics, MapmyIndia, Godrej Consumer Products


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A return to the Washington Consensus

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Investors should keep a focus on relative valuations across sectors

Key takeaway from Budget 2023—Simplicity

Personal Finance—rooting for small savings

The devil is in the detail


Technology, the creator of the Indian middle class dream, may now end it

The Eastern Window: China’s border aggression

Startup Street: Startups are no different from run-of-the-mill businesses

Manas Chakravarty
Manas Chakravarty
first published: Feb 4, 2023 11:20 am