Dear Reader,
It is said that Nature measures progress or success through how a species learns and evolves. Learnings are perfected and passed on from generation to generation. In exact sciences too such as physics once a theory is debunked, it never makes it back on the board. All this falls apart when it comes to subjective disciplines such as economics. This is where feelings and sentiment get involved.
There is a reason why business and economics are all about cycles: what we as investors learn, we also forget. We ‘feel’ our way into earning or losing our money. But there are reminders around if we only want to pay heed to them.
So, what are we forgetting about now and are there any reminders? Let’s start from the top.
India’s economic growth projections for FY25 and beyond have been upgraded by every forecaster in the past few months, including the venerable policymakers at the Reserve Bank of India. The argument is that the country’s potential growth has bounced back from the pandemic’s blow. Its fiscal balance sheet is repaired well enough for rating agencies to consider an upgrade -- which Standard & Poor’s has done by upgrading the outlook on the rating.
But Fitch Ratings isn’t going all the way yet. The agency has, of course, acknowledged the economic improvement. But it is holding out on the basis that India’s debt-to-GDP ratio is high compared with peers and even its fiscal deficit doesn’t quite make the cut. Private capex, on which everything is riding on, is yet to meaningfully take off. It in turn depends on private consumption improvement, something that hasn’t shown up at all. Manas Chakravarty’s aptly titled piece Fitch Ratings to India: Close, but no cigar brings you Fitch’s perspective. High growth is not new to India, we have visited high growth every 5-6 years (cycles, remember?). The period of 2004-07 saw high GDP growth, but it also had a high debt-to-GDP ratio. What followed was an economic slowdown and tightening of the fiscal belt.
While there is no denying that the government has done a good job on practising fiscal prudence despite a pandemic, the debt-to-GDP ratio of above 83 percent cannot be ignored. Are we going the way we went before? Sure, there is no Latin American debt crisis scare, but it pays to learn from Brazil, Mexico, and Argentina.
Our equity market party rests on India’s growth potential. You only must look at the countless times “strong fundamentals” and “growth potential” were thrown around in every valuation conversation. Is there a lesson here? Notwithstanding the exuberance around India’s stock market mainly because of its domestic investors, many have expressed concerns over the steep premium.
But would it be wise to grab everything and run? Larissa Fernand explains in her column that investors must evaluate their own game before selling. “The worst thing anyone can do is act impulsively, either by fleeing in a crash or a rally.” That is definitely a lesson worth remembering.
It is not just India but markets across the world seem to be on a high despite rising risks. As Gillian Tett says in FT piece, free to read for Moneycontrol subscribers, the US markets are focusing on a soft landing narrative and ignoring real threats like high debt, political uncertainty, and geopolitical disruptions. Multiple shocks have normalised deviant events in the eyes of investors. This makes learning difficult and it is easy to forget past lessons.
Another corner of the market where exuberance is being questioned is Artificial Intelligence. The massive erosion in chipmaker Nvidia’s market valuation despite the firm’s revenues growing at breakneck speed shows that the AI trade may finally be wearing off. Hedge fund Elliot Management has already called AI overhyped and there are only a few real uses of AI.
Meanwhile at a fintech event here, India’s blue-eyed fintech firms are busy pitching the next big idea, riding on the coattails of the success of UPI. Racking up volume has been a cakewalk for fintech, but when it comes to profitability, there is little to offer. Investors are getting tough here and funding isn’t easy to come anymore. Even though the Indian fintech industry grew by a staggering 56 percent in 2023, it is rife with business closures, regulatory flak, and valuation erosions. Questions on profitability have arisen. This is perhaps the right time to recall lessons from the dotcom bubble.
Finally, there is a cohort that is learning better. Indian borrowers are learning to closely monitor their credit scores and bring in some credit discipline. Our Chart of the Day brings the findings of credit bureau TransUnion Cibil about how small towns and villages are embracing credit discipline as well as more credit.
Keeping a hawk eye on credit score is a lesson that should endure from generation to generation. But here is a not-so gentle reminder: Knowledge is cyclical in economics.
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Aparna Iyer
Moneycontrol Pro
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