India Economy: Markets Sense the Scent of a?Slowdown

It is not yet a deluge of dismal news. State capex is slower. Food inflation is up, consumption is down. Interest rates are higher. Corporates earnings are lower. High frequency indicators are flashing amber and red. FPIs cashed out $ 8.4 bn in October. India is an outlier in the global context but what matters for India’s demography is not how well India does in comparison to others but how well it does relative to its potential.

Shankkar Aiyar | The Third Eye | The New Indian Express | 20 Oct 2024

It is flowing out in dribs and drabs and is not yet a deluge of dismal news. As high frequency growth indicators flash amber and red the stock markets seem to sense the scent of a slowdown.

This week, India’s savers were informed that foreign portfolio investors sold stocks worth $8.4 billion just in October, surpassing the levels recorded in March 2020. The exodus and dips in the Nifty50?—?only partly explained by the lure of China?—?are fuelled by fears of slowing growth and deceleration in earnings.

The pixels of the picture spell the story. On August 8, the Reserve Bank of India presented a bullish outlook for the economy, projecting GDP growth for the year at 7.2 percent. Governor Shaktikanta Das stated that India’s GDP will grow at 7.1 percent in the first quarter, 7.2 per cent in the second, 7.3 per cent in Q3 and 7.2 per cent in Q4. Three weeks later, the Ministry of Statistics informed that India’s GDP growth had slowed down to 6.7 per cent in the first quarter.

On October 9, the RBI recorded that growth was slower in Q1 but maintained that GDP growth in Q2 would be 7.2 percent. The forecast could be challenged if the slowdown visible in data on index of industrial production (IIP) persists. On October 11, MOSPI revealed that IIP contracted in August 2024?—?it was at (-) 0.1 percent compared to 4.7 percent in July 2024. The granular details are stark?—?the labour-intensive mining sector contracted by (-) 4.3 percent, electricity by (-) 3.7 percent, while manufacturing grew by just 1 percent. Yes, high frequency data is frequently volatile. But equally the contraction merits attention?—?particularly when bank lending is also slowing.

The deterioration in output and consumption is captured in data on revenue collections. Goods and Services Tax collections for September 2024 at Rs 1.73 lakh crore grew at 6.5 percent, slower than in recent years with seven states recording negative growth. Collections in many states were lower than the national average of 6.5 percent. Hope seems to rest on a revival of demand in the festive season!

The elephant in the room is the gap between desire and ability for consumption?—?and it is afflicted by poor wage growth in rural areas, food price inflation and youth unemployment. There is little dispute over the distress in the bottom half of the income pyramid?—?the magnitude of electoral sops unveiled by political parties illustrates this eloquently. Worsening this is the cost of money and poor access to credit for small borrowers.

The impact is visible in sales reports rolling out of companies. A report published by analysts of Motilal Oswal Financial Services estimates that the second quarter will see the slowest earnings growth for Nifty companies in 17 quarters. Uncertainty daunts small and big companies?—?Dabur issued lower earnings guidance for the quarter, IT giant TCS revealed a decline in profits for the first time since 2019 and mega corp Reliance Industries missed analysts’ estimates following weaker margins.

Automobile sales are seen as a bell-weather indicator by markets. This week, Bajaj Auto cautioned markets that two-wheeler sales may grow by barely 5 percent this year. Industry data underlined growing fears?—?sales of passenger vehicles dipped 19 percent, commercial vehicles slid 10.9 percent and two wheelers fell by 9 percent. For sure, the coincidence of heavy rains and inauspicious pitru-paksha matters, but so does the baffling 80-plus days of inventory pile-up with dealers.

Money makes the mare go around and fuels consumption and growth. Consider the fiscal flux first. India’s growth story has largely been propelled by government investment, and the elections did disrupt expenditure and growth. The consensus view was that front loading of public sector capital expenditure would nudge private capex and drive growth.

It turns out capital expenditure declined across states on a year-on-year basis between April and August. This week, ratings agency ICRA reported that states will miss the yearly target for capex and 13 states will witness a slippage in deficit targets. Indeed, Sonal Varma and others at Nomura in a report this week characterised the slowdown as “the growth glass looks half empty”, cited proprietary indices to quantify the slowdown and pegged GDP growth this year lower than RBI at 6.8 percent.

Growth requires alignment of fiscal and monetary policies?—?efficiency in how the government enables absorption of allocations, how it spends and the cost of money. The RBI has sustained high interest rates for over 20 months. This despite the fact that central banks are lowering the cost of money?—?the US Federal Reserve and the European Central Bank cut interest rates to sustain growth.?

In January, the RBI argued that food price inflation was outside its realm and in August, it argued that it is obliged to bring it down. Meanwhile, food inflation has persisted above 7 percent. The RBI seems to harbour the notion that growth can be sacrificed even though it is clear the implications are dire for India’s demography.

It is true that India is an outlier in a global context. That said, India’s relative merit rests on domestic growth?—?particularly when global trade and investment flows are challenged by the confluence of tidal waves of geopolitics. Sustaining the aspirations of a billion-plus populace calls for attention and action. The issue is not how India does in comparison to others but how well it does relative to its potential.

Shankkar Aiyar, political economy analyst, is author of ‘Accidental India’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’ and ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’.

You can email him at [email protected] and follow him on X / Twitter @ShankkarAiyar. This column was first published here. His previous columns can be found here.