The present dispensation will come thumping back to power in the ongoing Lok Sabha polls is a wide expectation. Hence, stocks climbing on this expectation seems a tad unreal.
A surprise would not be Modi & Co. returning to power, but the grouping not making it on a vote count would be. So, any surprise in the poll outcome should be negative and not positive for the market.
But beyond the outcome of the polls, there are several other factors that don’t portend positive tidings. There are several indications reflected in data and anecdotal evidence that point to pain in sections of the economy. There are also concerns around what’s leading to green shoots in certain segments like consumer goods.
Here's a look at some of these worrying signals.
Some argue that the recent pick-up in rural demand has more to do with urban migrants heading back to their villages ahead of the polls and spending related to the polls and doles to voters. If that indeed is the case, the fledgling recovery in rural demand may not sustain.
IT services has been a key employment driver in Urban India. Unfortunately, weak global demand has hard pressed India's IT majors to control costs. This led to the top five companies - Infosys, TCS, Wipro and peers, collectively seeing a decline in headcount in financial year 2024 for the first time in over a decade.
More so, it does not seem like there will be a big pick-up anytime soon. The recent news of IITs seeing a big dip in placements and salary cuts suggests a downward shift in not just employment, but incomes and adds to the signs of worries. And now with AI expected to lead to higher productivity and lower labour intensity, a sharp recovery seems unlikely and Global Capability Centers (GCCs) will only be able to pick up so much of the slack.
Even as forecasts suggest average salary increments could be about 9% in 2024, the sharper escalation in rentals in several cities like Mumbai, Bangalore and NCR suggest that the salaried class may feel constrained to spend going forward. The recent rise in prices of metals and the heatwave could add further pressure.
While makers of air-conditioners and ice creams are having a bumper summer and power demand is soaring, there are growing concerns that a prolonged heat wave could impact agricultural output. Output of fruits, vegetables and crops could be hit as yields drop, and this can fuel food inflation.
There are always two sides of a coin. While some seem to be celebrating premiumization, there is a growing worry about weakness in the affordable category. Here, it pays to reflect on the income divide in the country. The top 10% account for about 65% of the wealth, and are likely drivers of the premiumization trend, even as 40% of the middle-income population, accounting for under 29% of the wealth, grapples with low-income growth, unemployment and rising inflation. The rest of the 50% population is poor and continues to battle more basic life challenges.
For the economy to do well on a sustainable basis, the middle-income population has to participate. Consumption of low-end bikes, FMCG products, affordable housing has to rise, if the economy truly has to grow and India has to become a developed economy. Unfortunately, there aren’t enough signals of revival in these segments as of now.
Much of the optimism and growth in the premium and luxury segments is likely to be the wealth effect for a section of the population. A booming stock market, soaring bullion prices and a revival in the real estate market suggest that significant wealth has been generated in the recent run and some of this wealth is being redeployed and spent. However, as in the past, such wealth is not a sustainable driver of consumption and the economy by itself. It can at most, provide a transient boost. The tide can turn as swiftly.
It is evident that much of the bookings in the housing sector, for one, is driven again by investors and not end users today. And therein lies the risk.
The turn in fortunes of businesses in sectors like defence and railways have to do with the spending by the Government. While such spending is positive and does have multiplier effects, it would be difficult for Government spending alone to drive the economy. Schemes like PLI are positive for the manufacturing sector and job creation, but the success has been mixed if you look across sectors. More needs to be done to drive private capital investment and employment creation.
While the above factors do provide cause for pause, there is no doomsday scenario. The economy seems to be chugging along well. What is needed for the new government is to address the weakness in key sections of the economy and to help make the growth more broadbased and equitable. A more equitable growth will be more sustainable and will enable India to achieve its ambitious targets.
For equity investors, though, it would pay not to lose sight of valuations and temper their growth expectations going forward. While the India growth story is one you must be invested in, remember the market never moves in a straight line.
Happy Investing!
A surprise would not be Modi & Co. returning to power, but the grouping not making it on a vote count would be. So, any surprise in the poll outcome should be negative and not positive for the market.
But beyond the outcome of the polls, there are several other factors that don’t portend positive tidings. There are several indications reflected in data and anecdotal evidence that point to pain in sections of the economy. There are also concerns around what’s leading to green shoots in certain segments like consumer goods.
Here's a look at some of these worrying signals.
Rural Demand
Some argue that the recent pick-up in rural demand has more to do with urban migrants heading back to their villages ahead of the polls and spending related to the polls and doles to voters. If that indeed is the case, the fledgling recovery in rural demand may not sustain.
Urban Employment
IT services has been a key employment driver in Urban India. Unfortunately, weak global demand has hard pressed India's IT majors to control costs. This led to the top five companies - Infosys, TCS, Wipro and peers, collectively seeing a decline in headcount in financial year 2024 for the first time in over a decade.
More so, it does not seem like there will be a big pick-up anytime soon. The recent news of IITs seeing a big dip in placements and salary cuts suggests a downward shift in not just employment, but incomes and adds to the signs of worries. And now with AI expected to lead to higher productivity and lower labour intensity, a sharp recovery seems unlikely and Global Capability Centers (GCCs) will only be able to pick up so much of the slack.
Inflation
Even as forecasts suggest average salary increments could be about 9% in 2024, the sharper escalation in rentals in several cities like Mumbai, Bangalore and NCR suggest that the salaried class may feel constrained to spend going forward. The recent rise in prices of metals and the heatwave could add further pressure.
Heatwave
While makers of air-conditioners and ice creams are having a bumper summer and power demand is soaring, there are growing concerns that a prolonged heat wave could impact agricultural output. Output of fruits, vegetables and crops could be hit as yields drop, and this can fuel food inflation.
Premiumisation
There are always two sides of a coin. While some seem to be celebrating premiumization, there is a growing worry about weakness in the affordable category. Here, it pays to reflect on the income divide in the country. The top 10% account for about 65% of the wealth, and are likely drivers of the premiumization trend, even as 40% of the middle-income population, accounting for under 29% of the wealth, grapples with low-income growth, unemployment and rising inflation. The rest of the 50% population is poor and continues to battle more basic life challenges.
For the economy to do well on a sustainable basis, the middle-income population has to participate. Consumption of low-end bikes, FMCG products, affordable housing has to rise, if the economy truly has to grow and India has to become a developed economy. Unfortunately, there aren’t enough signals of revival in these segments as of now.
Wealth Effect
Much of the optimism and growth in the premium and luxury segments is likely to be the wealth effect for a section of the population. A booming stock market, soaring bullion prices and a revival in the real estate market suggest that significant wealth has been generated in the recent run and some of this wealth is being redeployed and spent. However, as in the past, such wealth is not a sustainable driver of consumption and the economy by itself. It can at most, provide a transient boost. The tide can turn as swiftly.
It is evident that much of the bookings in the housing sector, for one, is driven again by investors and not end users today. And therein lies the risk.
Capex Push
The turn in fortunes of businesses in sectors like defence and railways have to do with the spending by the Government. While such spending is positive and does have multiplier effects, it would be difficult for Government spending alone to drive the economy. Schemes like PLI are positive for the manufacturing sector and job creation, but the success has been mixed if you look across sectors. More needs to be done to drive private capital investment and employment creation.
Not All Is Lost
While the above factors do provide cause for pause, there is no doomsday scenario. The economy seems to be chugging along well. What is needed for the new government is to address the weakness in key sections of the economy and to help make the growth more broadbased and equitable. A more equitable growth will be more sustainable and will enable India to achieve its ambitious targets.
For equity investors, though, it would pay not to lose sight of valuations and temper their growth expectations going forward. While the India growth story is one you must be invested in, remember the market never moves in a straight line.
Happy Investing!
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