In the October of 1999, the Bombay Stock Exchange’s benchmark Sensex hit 5,000 for the first time, on the back of a victory for a BJP-led coalition in the 13th Lok Sabha election. The BSE top brass reckoned it was time to celebrate — the Sensex’s exploits, not the BJP’s — and promptly released 5,000 balloons of various colours from the terrace of the stock market building in South Mumbai.
Cut to April 2017, when earlier this week the Sensex skyrocketed to an all-time high of 30,146 before closing the day above the 30,000 mark for the first time. There was no national election win to celebrate, although it was no coincidence that a rampaging BJP — basking in the after-glow of a landslide in the Uttar Pradesh assembly poll — had swept the municipal elections in Delhi on the same day. Dalal Street’s liquidity surge can do little to mitigate Delhi’s civic woes but, with the party at the Centre scoring big in yet another election, a winning sentiment can be contagious. Particularly when the party with the winning streak is at the helm of the Central government and perceived to be pro-reform and development.
“There have been numerous reformers elected around the world. But (Prime Minister Narendra) Modi’s reforms seem the most likely to bear fruit,” says Mark Matthews, head of research (Asia) at Julius Baer, a Swiss private banking group.
And, yes, if 5k in 1999 had its 5,000 balloons, 30k in 2017 was celebrated with a humongous 30 kg cake.
That the sentiment is bullish is reflected in the willingness of business owners to put their mouths where the money is — where else but on Dalal Street, where a rash of upbeat firms are readying to go public. Over 50 companies are expected to raise between Rs 40,000 crore and Rs 60,000 crore in 2017-18. “It is just the tip of the iceberg. As the India story unfolds, let’s sit back and enjoy the rally ahead, as this time it’s different,” says Vikas Khemani, CEO, Edelweiss Securities.
That’s not the only good news. India, it seems, remains the fastest growing major economy in the world, with GDP growth at 6.7% (IMF estimates) or 7.1% (Indian government) in 2016-17. IMF’s forecast for 2017-18 at 7.2% is even better. India has become a hot destination for foreign capital with a record FDI of $46 billion in 2016. And India jumped one spot to No. 8 in the AT Kearney Foreign Direct Investment (FDI) Confidence Index 2017. “India remains one of the few bright spots in the global economy, with growth and reform gathering momentum,” says Hong Kong-based James Thorn, senior investment manager, Aberdeen Asset Management Asia.
Exports (non-oil) have been rising. Inflation is contained. Interest rates are low. The government’s fiscal deficit — a measure of its balance sheet health — has been improving. And few governments in India have looked as stable in a long time. “I can’t remember the last time we had such a good macroeconomic condition,” says Rashesh Shah, chairman, Edelweiss Group.
Another World, Another Mood
Far from Dalal Street, in India’s Silicon Valley Bengaluru, K Lakshmikanth takes you to another world, another mood. The managing director of Head Hunters India Ltd has kept a close eye on the job market since the 1980s and focuses on CXO-level hiring. Resumes landing on his desk have surged from 1,200 a day in 2015 to over 2,000 today.
“They spike every time there is bad news from the US — either a shooting in Kansas or an H-1B visa curb,” he says. IT services giants like TCS, Infosys, Wipro, Cognizant are cutting down new hiring by over 40%, he guesstimates. They are also shedding staff. Cognizant is reportedly cutting down over 6,000 staff from a total headcount of over 2.6 lakh.
News from the startup world too isn’t good, says Lakshmikanth. Big etailers like Flipkart are hurting and in consolidation phase. “There is a desperation. People have become flexible about salary, location and even job profile,” he says. Companies in turn have become cautious, discerning and are taking lot longer to hire. “The 2001 dotcom bust was bad but seemed cyclical. The 2008-09 period around the economic crisis too was bad but shorter. This looks like the result of a long, deep, structural shift as the IT industry reconfigures its business model,” adds Lakshmikanth.
Entrepreneurs are a worried lot. Over 500 startups have reportedly shut down between 2015 and 2016. Established private sector companies aren’t in any mood to invest. “Capacity utilisation is dropping, consumer demand remains muted and corporate credit has been falling,” says Madan Sabnavis, chief economist, Credit Analysis and Research Ltd.
Unravelling the Dichotomy
“It was the best of times, it was the worst of times…” Set in 18th century Europe, Charles Dickens’ A Tale of Two Cities talks about the dichotomy and contradictions of another era. Comparing 21st century India to that age would be an exaggeration. Yet never has the dichotomy between what numbers tell us and how people feel been as dramatic as today. Economists and entrepreneurs, experts and think tanks are unanimous in the existence of this dichotomy. The reasons they offer vary, though.
“There is a dichotomy. The macro-economic story is nice and even promising. But people in general are a lot less enthusiastic,” says Mahesh Vyas, managing director, CMIE, an economic think tank. He adds that the lack of enthusiasm in people is best captured by the BSE-CMIE-UMich Index of Consumer Sentiments. As of week ended April 23, this index was at 97.7 against a base of 100 between September and December 2015. This means that consumer sentiments are lower than they were about 6 months ago. “Sentiments are particularly poor in urban India,” says Vyas. The lack of enthusiasm in enterprise is best captured by the lacklustre trends in investments. New investment proposals during 2016-17 at Rs 7.8 lakh crore were lower than Rs 8 lakh crore in 2015-16 and Rs 10.2 lakh crore in 2014-15.
Historically, India has had bad macroeconomic conditions (fiscal deficit, inflation et al) but good micro-economic conditions (consumer demand, corporate investment). “This is the first time as far I can remember when the situation has reversed — good macro and bad micro,” says Shah of Edelweiss.
In a country where the informal sector is estimated to contribute about 40% to GDP and employs 9 out of 10 workers, a few like statistician Pronab Sen attribute the dissonance to the big divide between the formal and informal sector. “All the factors you talked about — GDP, stock market, FDI, exports — are indicators from the formal corporate sector. It’s the poorly tracked informal, unorganised sector that is not feeling well,” he says.
Rajiv Kumar, director, Pahle India Foundation, reckons that the present GDP growth does not feel like 7% for a reason. “From our past experience we know what that felt like and the buzz it created,” he says. It is estimated that the black economy contributed over 25% to India’s GDP. The squeeze in the parallel economy, thanks to NDA government’s concerted efforts including demonetisation, have had an impact. So, earlier, a 7% GDP growth actually felt like 9%, thanks to the impetus it got from the parallel economy. Now, with demonetisation and other curbs, black economy has suffered, making 7% actually feel like 5%. “Think of a bottle of soda. Everything is the same. Just that the buzz and the fizz at the top is now missing, thanks to the informal economy,” says Kumar.
Partly, it could be the urban-rural divide at play. The agri-dependent rural sector is hurting. “It is well reflected in the 6-8% sales growth that the FMCG sector has seen in the last few quarters,” says Kunj Bansal, chief investment officer (equities), Centrum Wealth Management. First it was two years of drought that made things difficult. Then, although the monsoon didn’t disappoint in 2016, demonetisation was a surprise dampner. “Crop output bounced back in 2016. But prices of many crops from potatoes to onions to tomatoes collapsed. Take the case of toor pulse where it slipped below the MSP,” says agriculture economist Ashok Gulati. This has dented farmers’ income.
Economist Kaushik Basu, who served as the chief economic advisor to the Congressled UPA government, says that overall on economic policy India has done well, barring demonetisation. The GST, the new bankruptcy law, the effort to cut bureaucratic costs stand out. He says this is showing up in India’s market and growth indicators. “The despondency is because of politics. A vast majority of educated Indians are worried about the rise of political and social extremism,” he says.
Could this dichotomy be just a number fiddle? In early 2015, the NDA government brought in two important changes in the way India calculated its GDP. It changed the base year from 2004-05 to 2011-12. And it began calculating GDP based on gross value added at market price rather than factor cost. “This is in line with the global practice,” says Sunil Sinha, director (public finance), India Ratings & Research.
This new method meant that 2013-14 GDP growth got revised upwards to 6.9% from 4.7% as estimated earlier. “Many, including us, have raised concerns about the new GDP series,” says Jahangir Aziz, chief Asia economist, JPMorgan Chase. While GDP numbers suggest the economy is growing well, other data like IIP (index of industrial production) and manufacturing growth do not reveal a pretty picture. Vinayak Chatterjee, chairman, Feedback Infrastructure, says none of the real-world data, from RBI’s corporate credit number to coal, power and cement consumption, correlates with what GDP data is signalling.
“Forget the feeling and let’s just focus on the numbers we have got. The dichotomy is in the government data,” says Aziz, who feels that the stress in the poorly tracked informal sector has not been adequately captured in the GDP numbers. “I would like to see the MCA (ministry of corporate affairs) database and CSO (Central Statistics Office) methodology to be assured,” he adds.
What is beyond doubt is that the private sector, weighed by bank loans and poor capacity utilisation, remain tight-fisted. Banks have turned cautious, reeling as they are from non-performing assets — total stressed assets of scheduled commercial banks stood at Rs 9.64 lakh crore as of December 31, 2016. Chatterjee says “the biggest worry is the massive drop in gross fixed capital formation” (or net investment) from 34.3% in 2011-12 to 29.2% in 2016-17 (see “The Bad News”).
The government may have revved up infrastructure spending but has not been able to make up for the lack of private sector investment. The government today accounts for two out of every three rupees spent on infrastructure, with its share now touching 68%, the highest since 2007. CMIE data shows that overall growth in infra projects has slipped from double digits to 8.8% in the January-March quarter.
It’s the Jobs, Silly
“Data is much more positive than the experience of it,” says brand consultant Santosh Desai. Perhaps it may disproportionately have to do with the mood in the job market. In a populous country, with close to a 500 million-strong workforce and 12 million new workers joining every year, a sluggish job market has the capacity to spoil the party.
Agrees Arindam Bhattacharya, director, BCG-Henderson Institute: “India has one of the lowest employment elasticities — growth of employment relative to growth of economy — in the world.” According to government data, India has had jobless growth between 2004 and 2012 when annual employment growth stood at 0.5% as against a 2.9% growth in the workforce.
“Growth is coming more and more through technology and not jobs,” says bureaucrat Arvind Mayaram who was finance secretary in the UPA government. Take HDFC Bank. In the third quarter of 2016-17, even as its profit grew by 15%, staff count was down by 4,581, thanks to automation, among other reasons.
The technology revolution is happening at a time when India is trying to transition out of a low-income economy and move millions from agriculture to non-agriculture jobs, says Samir Saran, vice president of Observer Research Foundation. Even the labour-intensive SME sector is going through this shift. Take the case of Haryana-based Galaxy Plywood.
In five years, its revenue has risen from Rs 7 crore to Rs 10 crore today but the staff count remains static at 100 direct and over 70 indirect workers. “With rising minimum wages, installing machines like conveyor systems and forklifts is cheaper and more efficient,” says Galaxy Plywood owner Jugal Kishore Bihani. Labour-intensive sectors like construction and real estate are all hurting. While big job providers of the past like telecom, IT, BPO, banking and more recently digital startups are shedding jobs, there is a virtual absence of a sunrise sector that may hire in big numbers.
India is witnessing structural shifts at multiple levels. Transitions from an informal to formal economy (GST will hasten it), cash to digital (triggered by demonetisation), rural to urban, offline to online are all happening simultaneously. At least partly, these shifts could explain the dichotomy between what the numbers tell you and what people feel.
Take etailers vs brick-and-mortar retailers. Consumption may still be copious but digital retailers like Flipkart and Amazon and organised retail plus kirana stores are competing for the same customer. However, there are some good reasons to be optimistic.
“This government has not taken short cuts to push growth through quick and easy monetary policy, which gives an instant consumption boost (but may not be sustainable). It is a prudent policy,” says DK Joshi, chief economist, CRISIL. The government has pushed a lot of reforms and policies — from tackling NPAs in banking and rooting out inefficiencies in the power sector, to recasting the subsidy regime and clearing GST. This should lay the ground for a stable and sustainable recovery. “This government does not want to repeat the mistake NDA made in 2004 with its India Shining campaign,” says Tarun Das, former director-general of industry association CII.
Shah of Edelweiss sees the glass half full. “In the beginning, all recoveries are tentative and hesitant,” he says. True, unlike 2004-08 when exports, investment and consumption were all firing, today the economy is running on fewer growth engines. A gradual build-up may be more desirable for a stable and sustained recovery.
Perhaps bulls on Dalal Street have got a whiff of what lies ahead. “Stock market is always ahead by seven-eight months,” adds Shah. As long as the indices don’t race ahead of themselves.