India today looks as if somebody stuck a pole into a beehive and shook the bees out of their daily routines. You don’t mess with bees’ routines for they get really angry! Indians today are angry over what they perceive are the acts of a “fascist” government, including raising hostel fees that have been stagnant for over 40 years and have no relation to the current levels of purchasing power. Others are angry at those who are angry. Yet others are letting off steam unrelated to the current issues but maybe just the stress in the extended family—why waste a good fight? Most others are generally feeling bad about the news of a slowing GDP, a consumption pull back and an overhang of bad news about the economy. One part of the country, however, seems to be immune to this anger and grief—the republic of the stock market is literally on its own trip and is hitting new highs every other day. What’s going on?
When a consumer goods firm says that it is finding five-rupee biscuit packs difficult to sell, you know the slowdown is not limited to white collar jobs and to people like us, but is biting down hard across the board. The signs of slowdown are everywhere—in the sudden job losses reported across the country, in the tiny increments that keep the income barely above inflation, in the stories that friends and family tell of small businesses struggling to stay alive, of poor sales off-take, of downgrading of stuff from premium to pure utility and then postponing purchases.
One way to understand this pain is to see it in the context of a larger change in the political narrative that wants to clean up the country—Swachh Bharat is not just about a physical clean-up but towards a cleaner way to do business and freedom from corruption. You can read more about this here.
It looked as if the rain would derail the annual Mint Mutual Fund Conclave in Mumbai where every year we debate issues related to the industry and investors. This year since we had the chairman of the Prime Minister’s Economic Advisory Council, Bibek Debroy, giving the keynote, we decided to have a closed-door roundtable where he would interact with some financial sector leaders to have a candid conversation about issues like the real GDP numbers, the budget, the slowdown that industry says is palpable and the changed rulebook of this government. There is worry among employees, investors and the industry on the slowdown in the economy. Wealth managers peg their advice and asset management decisions on potential growth, and if this number is in doubt, the ground moves from under the feet. But as the rain did not keep away the financial sector leaders or the delegates, there was an animated debate. Here are a few takeaways from the conversation and the event.
The GDP (gross domestic product) number controversy is hugely important for all those looking at stock market-linked returns for their money. Retail investors who are today pouring in almost ₹1 trillion a year, or about ₹8,000 crore a month, in equity funds, are basing their investments on Indian growth. That this 7-8% growth could have been false is cause for concern to these households. What happened to make them worry is this: India’s former chief economic adviser (CEA) Arvind Subramanian gave legs to the idea that India’s growth numbers were overstated in his paper, titled India’s GDP Mis-estimation: Likelihood, Magnitudes,Mechanisms, and Implications.
He used a set of 17 indicators that are strongly correlated to GDP growth to estimate it and found a 2.5 percentage point overestimation per year for a six-year period ending 2017 (across UPA-2 and NDA-1). That a loud and vocal set of people is willing to simply take this number of 4.5% GDP growth on the basis of one academic paper, setting aside the entire statistical machinery of India whose only job is to do this math using well-established processes and systems, points to a hurry in grabbing any evidence they can find to suit an agenda. If somebody has already decided that this government is wrong no matter what, then they use any piece of data—real or imaginary—to support that belief. The government is putting out its response.
Have you been feeling low lately? Generally pessimistic and grumpy? I met a colleague in the lift bay and swapped stories. A fund manager drops by to meet me and we discuss how everybody feels much older than before. That the last 10 years feel like 20. Many conversations over the past few months lead me to think that the urban mass affluent Indian is not feeling too happy. It’s a big come down since the go-go days of 9% growth. No wonder that the Misery Index for India is the highest since 1991. Nomura Research has tweaked the classic Arthur Okun method of adding the unemployment and inflation rate (higher levels of both, the argument goes, would cause higher economic and social distress) to take the difference of the Index of Industrial Production growth and the Consumer Price Index to construct the Indian Misery Index. The swap was made necessary by poor employment data in India. The greater this difference, the higher is the misery index. With inflation persistently high and industrial production and jobs falling, no wonder the lines of worry are settling in. Add to this the sheer persistent deluge of bad news across all fronts—economic, political, social, moral—and the picture looks even worse.
The looming clouds of disaster are now overhead as economic data quarter after quarter show how serious the downturn is and expose the government lies, doublespeak and market talk-up over the last three years. As veteran employees, we learn to decode the signals of a slowdown fairly quickly. At the beginning of an economic slowdown, the first few cost cuts are around training, offsite events, office parties and travel budgets. You know the slowdown is deepening when fresh hiring is frozen and then travel. You know that things are getting really bad when even replacement hiring gets hit. Other signals that the company you work for is struggling are delayed salaries, restrictions on tiny expenses such as beverages and publications. And then when the news is all about shutting down of a business unit and of mass firings to reduce employee costs—you know that the economy is in a hole that will take a long time to dig out of. The macro problem of a slowdown comes home into individual households when jobs are lost. The job losses for the urban Indian mass affluent are hurting even more because our lifestyle costs have got pegged to an economy that was growing at 9%.
India is at risk of losing its investment grade rating, which would make it the first BRIC (Brazil, Russia, India, China) economy to have its rating reduced to junk status. On 11 June, the US rating agency Standard and Poor’s (S&P) released a report titledWill India be the first BRIC fallen angel?, warning of the possibility. The outlook on India’s rating had been reduced from stable to negative in April this year. The positive-negative-stable outlook that rating agencies use is like an early warning flag that tells the market what could lie ahead. A stable outlook says that the current sovereign rating of the country will not change in the next few months. A negative outlook means that there is a danger of the rating getting downgraded; the positive one is the reverse—the rating may get better. India moved to the investment grade rating in 2007 and has been stable at an S&P BBB-, but this changed in April with the stable outlook changing to negative. If India’s rating slides a notch, we move to the highest grade in the speculative grade ratings, or a BB+. It usually takes between six months and a full year before the outlook change translates into a rating change. The S&P report, coming so soon after the change in outlook, has taken the market by surprise.
The news gets worse every day. Food inflation is in double digits and the base effect argument is now wearing thin. The forecast for prices does not look good, never mind what the periodic calming statements by those in the government say. Interest rates are rising and another rate hike is imminent. One corruption issue after another erodes the credibility of the Central government and the regional satraps already smell blood. The markets are finally shedding some of the extra points the index had gathered in the momentum of the “we’ve-kicked-the-global-slowdown” euphoria. You’re worried about your money invested in the market and wondering if you should wait before you enter the market: should I wait for it to settle a bit?