We are relieved to know the sky did not fall in the September quarter. The eagerly-awaited gross domestic product (GDP) growth for the quarter, at constant prices, came in at 4.5 percent year-on-year (YoY), more or less bang in the middle of the range of expectations.
Another quarter, another damning statistic. So, here is a question: If the unemployment rate among urban youth aged 15-29 years was an eye-popping 22.5 percent in the March 2019 quarter, when real GDP growth was 5.8 percent, what will the unemployment rate among urban youth be in the September quarter, with GDP growth at 4.5 percent?
But the overall growth number is not the whole story. If we take out government consumption from GDP numbers, growth in the private sector part of the economy is a mere 3.1 percent YoY, truly execrable.
In the June quarter, growth in this yardstick was 4.5 percent. It is the huge 15.6 percent growth in government consumption from a year ago that propped up GDP growth in the September quarter. Perhaps we should change the headline for this piece to ‘Ugh, that stinks’.
The saving grace was that private consumption did better, possibly because of the impact of stocking up for an early festival season.
Gross value added (GVA) growth in construction, the source of jobs for the masses, was lower in the September quarter. In manufacturing, if we have another quarter of contraction, we’ll have a recession. Agriculture had slightly higher GVA growth than in the June quarter. The only other sector that saw higher GVA growth was ‘Public administration, defence and other services’, a proxy for government spending.
GDP growth at current prices for the September quarter was 6.1 percent, the lowest in the 2011-12 series. It is no wonder that tax revenues are so low.
Not that the markets are overly bothered about the GDP data - if they were, they would not have scaled new highs this week. The reason why they tanked on November 29 was not that they were worried about all the moaning and groaning about the divergence between the earnings growth and stock prices, but because of another bout of nervousness whether the US-China trade deal will get done after Donald Trump signed a law backing the protests in Hong Kong.
It has absolutely nothing to do with India, but the market has been propelled upwards by foreign investors pushing funds towards emerging markets on the back of a likely trade deal and any worries the deal may be in jeopardy leads to the markets having a fit.
Of course, it is not the only reason for global markets to be worried - John Hussman, well-known hedge fund manager, tweeted, ‘our projection of 12-year total returns on a conventional 60 percent, SPX, 30 percent T-bond, 10 percent T-bill mix is now within 0.01 percent of the historic low set in August 1929.’
August 1929 was when the Great Depression began. Hammering the message home, he added: ‘Congratulations to the Federal Reserve! You've successfully created the most extreme, pre-collapse yield-seeking bubble in US history! With lower return prospects than Aug 1929! While encouraging a debt bubble where half of all "investment grade" debt is one step above junk!’
At the other side of the world, the week saw Chinese industrial profits in October plunged by 9.9 percent from a year ago, the biggest drop on record. On the bright side, it piles on the pressure on President Xi to swallow Trump’s insult on Hong Kong and cut a deal.
We had warned the markets looked toppy in our piece on irrational exuberance, underlining that it was liquidity alone that was fuelling the rally. We also had a nice little chart that more or less summed up the top-heavy nature of the market.
Nevertheless, the love fest in the equity markets was a welcome change to the unedifying spectacle played out in Maharashtra politics during the week, with the BJP deftly managing to snatch defeat from the jaws of victory. The one policy that all political parties seem to agree is of paramount importance is that they must do whatever it takes to grab power. There is no doubt, of course, they do it for the people.
The markets blithely ignored the entire Karvy scandal, despite several reports hinting that Karvy is not the only cockroach in brokers’ kitchens. After our last week’s report on the upsurge of bank frauds and several high-profile cases of dodgy business among non-banking finance companies and in the corporate sector, this week saw an alleged scam break in the market’s own backyard, that too in one of the biggest and most reputed registrars and brokers in the country. As we pointed out, the damage may be contained, but trust has been broken. On a more practical note, we asked whether RBI taking DHFL to the bankruptcy court would help debt funds and investors recover their money.
Not content with the current problems in the financial sector, the banks are setting themselves up for another rash of non-performing assets (NPAs), this time in Mudra loans. RBI deputy governor MK Jain raised the red flag on Mudra loans this week.
In such an environment, it is not easy being an equity analyst. Thankfully, our independent research folk have no fear in boldly going where sell-side analysts fear to tread.
That is why, in addition to their usual stock picks, they have warned investors to proceed with caution here and here and here. The last of those was one of the fastest-growing NBFCs in the country before the liquidity crisis took its toll.
Lest we are accused of being bears, I must point out that we praised the government’s efforts to boost mobile phone manufacturing in the country, while of course exhorting them to do more. We welcomed the government’s push, albeit a cautious one, to labour reform. And we recommended stocks that would benefit from increased government spending in the railways. But we had no option but to point to the ill-effects of leaving a loophole while bringing down the corporate tax rate that could result in a lot of uncertainty for companies.
To the burning question whether the worst is behind us, we would point to the continuing fall in bank lending, the fall in railway freight, in truck freight rates, electricity generation and the latest data for the core sector that indicate there is pain still to come.
Next week’s Purchasing Managers’ Index (PMI), which will give us a month-on-month snapshot of the economy, should also provide some answers.
The composite PMI showed the private sector contracted in September and October and we would like to see whether that contraction has stopped in November. We also have the auto numbers, the global PMIs and the Monetary Policy Committee meeting, where they will probably cut interest rates again. Of course, we will also be looking for signs of whether a Santa Claus rally is in the offing.
Here’s looking forward to an action-packed and lucrative week ahead.