Indian Economy & Capital Markets: The divergence

- Dr. Kishore Nuthalapati

Indian stock market cap touched a high of $5 trillion in May 2024 before receding marginally. This translates to market cap to GDP (Gross Domestic Product) ratio of 140%. There is no standard ratio, but for an economy like India it is considered that the ratio is in order between 85% to 90%. Therefore, 140% ratio hints that the market movements could be divergent. Of course, before the global financial crisis, Indian market cap to GDP touched all time high of 150% and the story of correction thereafter is known to everyone.

As RBI (Reserve Bank of India) released the Indian capital market numbers as an appendix to its annual report of 2024, the statistics are worth taking note of. Dynamics of capital markets do have relevance with the economic strength of the country.

Indian GDP is about $3.466 trillion. The gross domestic savings rate of India has been declining from the average of 34% during years 2009-14 to about 29.7% in year 2023. The corresponding gross domestic investment rate which used to an average of 38% during years 2009-14 has declined to 32.2% in year 2023. The deceleration in investment is greater than that in savings. The reserve money has increased by 6.7% in year 2023-24 but the broad money has increased by 11.2%. On the other hand, the aggregate deposits in the scheduled commercial banks increased by 12.9% in year 2023-24 whereas the bank credit of the scheduled commercial banks increased by 16.3% in year 2023-24. This implies that the borrowings have increased, they are not supported by the savings out of surplus incomes, the bank credit is increasing and with investment growth decelerating, the credit to consumption is increasing in the country which cannot be a healthy sign. ?

As at 31st March 2024, the external debt stock is $648 billion and per the forex reserves, the reserves to debt ratio stood at 96% and the import cover of reserve is 11 months. During the year 2023-24, the exports declined by 6.0% and imports declined by 7.3%. Due to this, the current account balance is still negative but has decelerated from negative 2% to negative 1.2%. The exports plus imports (of both goods & services) to GDP is 46.4% which is a decline of about 3.8% in year 2023-24. Such a decline has a positive feature that India’s self dependency factor improved and the negative is that the exports also declined and in the absence of increasing exports, no economy can develop beyond a level.

Capital markets are more exciting. The primary market has mobilized about Rs. 11.47 trillion during year 2023-24 which is about 30% higher than in 2022-23. Of the total funds mobilized, privately placed funds are 85.07%, rights & public issues are 8.92%, and qualified institutional placements are 6.01%. Of the total funds, private sector mobilized 61.36% whereas public sector mobilized 38.64%. This contrasts with shares in year 2022-23. Of total Rs. 8.88 trillion total funds mobilized in year 2022-23, private sector mobilized 58% whereas public sector mobilized 42%. This reveals that contradicting the wider belief that government was active in the capital markets in year 2023-24, public sector shrunk its share by 3.33% which was compensated by the private sector. The weighted average cost of borrowing of government which has been an average of 7.3% during the past five years, remained same during year 2023-24 as well.

The other interesting observations are that the financial sector mobilized about 5.77% less than non-financial sector when the total funds mobilized in year 2023-24 are compared with those in year 2022-23. In the primary market issues, equity funds constituted about 87.7% while debt funds are only 12.30%. Funds in Initial Public Offers (IPOs) are 73% whereas those in Offer For Sale (OFS) are 27%. In the privately placed funds, equity funds are a meagre 1.02% whereas debt funds are 98.98%.

In summary, the overall fund markets are still dominated by private placements, within the overall market, the IPOs are predominantly with equity instruments, and in private placements, the dominance is with debt instruments.

Does the above statistics explain a picture? Yes or no, but the observations are factual. The savings rate is gradually declining and is a worry. The deceleration in exports is uncomfortable. The investment rate is disconnectedly increasing. The increased bank credit is going towards consumption. The market cap to GDP ratio of 131% is unusually higher.

Disclaimer: Dr. Kishore Nuthalapati is an Economist, and is the CFO of BEKEM Infra Projects Pvt Ltd, Hyderabad, India. Views are his personal and do not reflect those of any of the organizations he is or was associated with.