Growing disconnect between Indian economy and its stock market..

Markets keep zooming as if economy is on fire. Mere mention of our economy “expected” to grow faster than China is enough to send bulls on a rampage. And that too by agencies whose predictions are as good as neighborhood pan store person.

Rahul Jacob of BS has a nice article in this regard:

hit new highs on Tuesday and Wednesday, in part because of projections that India’s gross domestic product growth rate might next year surpass China’s. The International Monetary Fund’s prediction was comparatively modest. Amid the recent whirl of business summits in New Delhi and state capitals across the country, no projection of exponential future growth for India, already an Olympian gold medal sport in the country, has seemed too outlandish.

Investors appeared to have ignored the comments of Hindustan Unilever’s (HUL’s) chief executive officer, Sanjiv Mehta, after India’s largest consumer goods company’s disappointing third-quarter results were reported on Monday. If they had listened carefully to the difficult time HUL’s management had trying to coax consumers to buy mundane products like skin cream, soap and detergents, it was akin to having a bucket of freezing water thrown at you on a winter day. Speaking of demand from urban areas and “modern trade”, Mr Mehta said, “volume growth is still negative.” This was despite the company cutting prices for its detergents and soaps by five to 10 per cent because of the fall in crude oil prices, which should have boosted volume growth. Instead, underlying volume growth in the third quarter was only three per cent. I own the company’s shares; given this softness in demand and competitive pressures they seem over-priced, but still made up nearly all their losses since Monday.

Such an anaemic recovery is a puzzle even for an economy growing at about five per cent, let alone one expected to be the fastest-growing major economy in the world very soon. The late CK Prahalad, who made the term “bottom of the pyramid” a mantra of optimism among marketers, would have been baffled. HUL, which made a virtue of selling shampoos in affordable sachets to rural consumers a couple of decades ago, now reports that many urban consumers are trading down from bottles to sachets and from 2 kg packs of Surf to 1 kg. In cities, the inflation of the past couple of years has acted like a de facto wage cut – why else would you start buying sachets of Fair & Lovely and shampoos when you once were buying these products in bottles? The optimistic rejoinder is that as a wider swathe of the population buy personal care products, such occasional “economising” was inevitable.

Rural demand, meanwhile, has been hit by drastically slowing wage growth (to the low single digits from the high teens for much of the past three years) even as has been scaled back, much lower hikes in minimum support prices and a steep drop in global prices of cash crops. “Rural demand, which was propping up consumption, has not grown. In a bad monsoon year, rural wages get depressed,” says Pronab Sen, chairman of the National Statistical Commission. “The urban middle class has been hurting for the past three years. What has kept us growing was the rural middle class.”

Further:

The 20 trillion dollar question is where a big boost to growth is going to come from. Mr Joshi is hoping for a “cushion” in rural demand for low-end fast-moving consumer goods products and two-wheelers – a pretty modest aspiration. If India can count on six to eight per cent export growth, argues Mr Sen, “you should count yourself lucky. After all, world trade is growing at two per cent.” 

…The reason why slower in India leads to a seemingly disproportionate scaling back of consumption on relatively low-cost products like detergents and soaps is partly explained by a World Bank study on inequality in South Asia. It showed, the net worth of a household in the bottom 10 per cent of India’s population can support its day-to-day expenses for less than three months while those in the top 10 per cent can live off their savings for 23 years. Catastrophes like losing one’s job, crop failure and large medical expenses are bad enough. Yet even the accumulated “deductions” of a high-inflation economy like ours has been until recently hobbles spending quickly and semi-permanently for those lower down the ladder of consumption. The good news from the study is that migration and urbanisation are allowing some 40 per cent of the children of unskilled parents to work in different, higher-paying occupations.

For an insight into speeding up those trends, we need look no further than China. Overshadowed by the euphoria that India is poised to overtake it in growth rates was an assessment of just how good some of China’s numbers revealed Tuesday were, its debt problems notwithstanding. Job growth for the economy was 13.2 million jobs last year, in excess of the government target of 10 million. Consistently low inflation of about two per cent – 1.5 per cent in December – played its part in the stellar increase in 2014 in per capita disposable income of eight per cent in cities, even higher in rural areas. To paraphrase the writer Vikram Seth on vs India comparisons, it is probably nicer to be rich or upper-middle class in India like most of Lutyens’ Delhi, but if you are poor or run a consumer goods company, China still looks a better bet.

Just hype and more hype for India. A country which just wishes to ride on the stock market boom without much to show on real economic front. The sheer weight of expectations generated by markets has blown beyond proportions. It might be an ugly end when expectations do meet with reality sometime in future.

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2 Responses to “Growing disconnect between Indian economy and its stock market..”

  1. orionp83 Says:

    Does the overwhelmed valuation to Indian equities is first time phenonmenon? No, the same question has been raised many times and again. Indian equities relative weights are going up and hence more money is chasing few good stocks, pushing up the broader market. As you too are aware, makets doesn’t price past events, looking ahead if there are good events expected even if releativly smaller in proportion as compared past, but still they are better when compared to peer equity markets. Thus the bullih trend.

  2. Amit Joshi Says:

    Which trading window is preferred if we want to make steady profit in stock market.

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