Based on interviews with Neelkanth Mishra - Chief Economist
Axis Bank, part-time member of Prime Minister's Economic
Advisory Council, and part-time Chairman of UIDAI:
India is showing resilient growth despite global headwinds.
Compared to most developed economies, we
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took longer to recover after COVID-19, but we are catching up now, and the
world is beginning to slip. The world recovered faster because
of considerable fiscal spending, but we were more prudent.
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What are the factors that increase
productivity and lead to growth?
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Labour joining the workforce - 1%
In the 1980s, it amounted to 3% of the GDP,
but now, as population growth is slowing
down, it amounts to about 1%. This is likely to
continue until about 2050 or so when the
labour force is expected to peak.
Total Factor productivity is
growing at 2%
- Labour quality - The education levels are
rising. This, too, helps to improve the
productivity in the country.
- We can assimilate best practices on the
services side. Productivity growth in
agriculture is minimal because of small
farm sizes, etc. Manufacturing is just
beginning to start to improve. In services,
we have done remarkably well. India's
share of services exports is growing faster
than the rest of the world. We have a low
share in freight, transportation, travel, etc.
For anything which does not require a
physical presence, we are much ahead of
the globe - we have an 8% share.
- Modern retail - is also growing faster -
e-commerce. We are 4% of the global
share, and with our continued growth of
20%, our share has grown exponentially.
- We are reimagining infrastructure, which
boosts productivity. Railways used to
struggle to grow, and capital spent was
mostly useless—but now it has taken off.
Highways are growing rapidly, and FasTag
growth is at 45% CAGR, which also
improves our productivity. The number of
airports is increasing. Internet usage is
widespread.
- Micro Infrastructure" is improving, and
this allows for broad-based growth. There
is electricity in every village, access to
piped water, and widespread cooking gas.
This hugely improves the productivity of
the women in the villages. As they save
time at home, they can spend more time
at work.
- Tax collection is improving - both directly
and indirectly.
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Capital formation had started
falling before COVID and is now
rebounding. - 4%
- Real estate went into a 10-year downturn.
with Demonetization, GST, RERA, etc.
Over and above the NBFC financing, the
real estate sector was in trouble,
culminating in the demise of ILFS – and
COVID was the final straw. This was more
than a 1% point drag on the GDP for more
than a decade. Real Estate is the single
biggest purchase for any individual. The
house’s value is more than 30 times your
basic annual expenditure on food and
clothing.
In 2021, the housing inventory started
falling rapidly, and it now has about 2
months of stock. This heralded the start of
the new real estate cycle. So, whereas real
estate sales do not really impact the GDP
too much (only brokerage), when the
houses are built there is substantial
growth in GDP.
- Manufacturing capacity utilization is back
to pre-COVID levels. As demand picks up,
manufacturing units will have to increase
capacity.
- We overconstructed power plants-even
when there was a coal shortage at some
point. Hence, no major power plants were
built in the last 8 years. However, in
October 2023, for the first time in many
years, we had a power shortage. Heat
waves are back, and so this will continue.
Hence, Real Estate, Infrastructure, and
Manufacturing capital formation should
add about 4% to the GDP. We have just
started this cycle.
Labour growth (1%), Factor Productivity (2%)
and Capital formation recovery (4%) - so 7%
growth to GDP should be a given - although
we need to target higher GDP growth.
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All this is happening despite HEADWINDS
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Need to reduce government debt to GDP.
As demand increases, the Government is
indeed cutting their expenditure. Reduction
in fiscal deficit is a drag on growth. So,
although the government is trying to be
more prudent, the government's debt to
GDP is expected to remain around this level,
so it is not impacting GDP growth.
Monetary tightening is also happening.
Tighter liquidity implies higher effective
interest rates. This slows down credit
growth. Whatever economic strength we
see is despite the removal of liquidity from
the system. For the last 18 months, there has
been no money expansion, which translates
into banks struggling to get deposits and
interest rates remaining firm.
Slowing global growth is hurting goods and
services exports. And yet India is still doing
well.
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Rising global cost of capital and the fiscal
challenge in the US. The debt held by the
Public in the US is 100% of the GDP. This is
expected to rise to 125% of the GDP in the
next 10 years. However, the CBO (their
tracking organisation) said that they made a
mistake of 3.% +, which will have a multiplier
effect over the next 10 years - up to 150%
debt to GDP. There is an 8.5% fiscal deficit
where unemployment is at 3%. If that
increases and/or there is a recession, it can
jump easily to 10% of GDP. Even this year,
their fiscal deficit has gone up by about
20%, i.e. from 7.5% of GDP to 8.5%. One of the
primary reasons for this is that revenues
have fallen sharply, which is an indication of
a slowdown.
This is not showing up in bond figures yet.
The US10-year Gsec spiked to over 5% but
came down again to 4.05% and is now at
4.24%. This is because 80% of the bond
requirement was met from Treasury bills of
less than 1 year. This is not sustainable.
Dollar shortages ex-US continue to intensify
until the Federal Reserve reverses its stand.
Credit growth is slowing down, and yet the
economy is growing - and hence, the dollar
availability is the worst since 1959. At some
time, the Fed will have to do quantitative
easing again as a repeat of the 2023 deficit
appears difficult to fund.
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FORECAST
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- Our Nifty premia over risk-free yields is very low, as the
global cost of capital is likely to remain elevated. The net
earnings yield vs. the US risk-free yield is at the same level as
it was in 2007 - 0.9%. As treasury yields are unlikely to fall,
Price/Earnings multiple has to fall. As the world became
used to almost zero interest rates, price/earnings multiples
rose sharply. Our economy is in much better shape than it
was 10 years ago - so from an average 13 PE multiple we can
be at a 16 PE multiple - but we are currently about 20 times.
- Nifty earnings are being projected to grow. Consensus Nifty
earnings estimates have been constantly increasing and
what is more positive, being revised upwards.
So unlikely to see a sharp drawdown on the Nifty. The
market will be driven by Earning growth rather than
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price-earning expansion. Nifty is currently about 1 standard
deviation above its 10 year average and if it stays where it is
it will be at the 10 year average next year because of
earnings growth.
- We can continue to grow at the earnings growth rate. We
are unlikely to see any more Price/Earnings expansion -
but earning growth of 15-18% can continue.
- We can have a time correction so that valuations fall to the
average, the Nifty stays at the same level, and earnings
continue to grow.
- If there is a global negative event, India will also correct
it, but with our good Macros, it would be a great
opportunity to buy.
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EQUITY MARKET
The equity market was volatile this month, especially the mid and small-cap stocks. Continue to look at Large-cap funds as
safer options over mid and small-cap - whose valuations are still expensive.
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DEBT MARKET
Yields are likely to continue to fall due to:
- Foreign inflows due to Indian bonds being included in the
JP Morgan bond index
- The government is committed to narrowing the fiscal deficit
due to strong tax collection and expenditure rationalisation.
- The liquidity situation is likely to ease.
- Core inflation is slowing down.
- The balance of payment is expected to be positive in 2025.
- Traditionally, growth slows down during elections.
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GOLD MARKET
Gold touched an all-time high in March at over US $ 2200 per
troy ounce. This is despite US interest rates inching higher and
also with the dollar index again crossing 104. Both these
events should have been adverse for gold - but alternatively, it
did reach all-time highs.
From February 29th to March 8th, 766 tons of silver were
delivered to India. It is understood that Reliance India is
building a 20-gigawatt photovoltaic facility and needs silver.
Silver could outperform gold this year, as it has
underperformed compared to gold, and could catch up.
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