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INDIA - A US$ 5 tn ECONOMY
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From about the 1st millennium BC to the beginning of the British Rule in the 1700s, India commanded about 25% of the World GDP. By the time we got Independence, it was 2.7% of the World GDP and was a $ 14 bn economy. It took us 60 years till 2007 to reach US$ 1 tn economy, 10 years to reach US $2 tn and we are on track to reach US $ 3 tn next year. Although due to a set back with Covid, US $ 5 tn economy is not far off.
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MAIN PILLARS OF THE ECONOMIC GROWTH WILL BE:
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- Public and Private Investment
Nearly 7000 projects in different sectors amounted to Rs. 111 lakh crores have been identified by the Government. Private Sector investment is also getting a boost due to higher capacity utilization, PLI schemes, Low interest rates and deleverage balance sheets.
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- Consumption
The Capex cycle has a multiplier effect with rising per capita income and hence, spending. Demography continues to be favourable with the working age population outnumbering the dependent population for many years to come.
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- Exports
India has so far been a consumption-led growth, where most developed nations have had an investment and export-led growth. Exports in IT, SAAS, Pharma, Chemicals, etc. are booming. Further, India is slowly but surely becoming a cog in the global supply chain.
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- Growth in the Digital Economy
The JAM (JanDhan, Aadhar, Mobile Connectivity) trinity has brought unexpected benefits of stopping leakages in welfare schemes and increasing connectivity. This was seen in the speed and accuracy of the vaccination scheme.
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- The Start-Up Ecosystem
The current value is estimated to be about 10% of the GDP. India has produced more than 40 Unicorns (valued US $ 1 bn) in the current year and the start-ups have raised close to $ 50 bn. This is bringing in much needed scarce risk capital and has a large multiplier effect as it is used to "burn money" i.e. to pay salaries, IT spends, travel, Marketing, etc. It is also creating many millionaires as ESOPs are encashed.
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- Government Reforms
Land Reform, Labour reform, Bankruptcy code, GST, RERA, etc. - all the reforms initially put a brake on economic growth, but we are now reaping the benefit of the reforms.
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- Change in Sentiment
Wealth Creation is no longer taboo, Risk is not just a four letter word. "Tax terrorism" is actually reducing. Ease of doing business is improving. Business Confidence has reached a 2-year high.
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November has been a very volatile month. After reaching an all-time high of 18100 on the Nifty, the market has been drifting downwards, with a collapse during the last week of November. The markets were looking for a reason to correct as it was long overdue and the valuations had become expensive.
The main causes:
- New Variant of Covid from Africa and the unknowns attached to it.
- Increasing Covid cases in Europe and lock downs starting again.
- Relentless selling by FIIs.
Comparatively much cheaper market valuations in China.
- Rising US inflation - and yet to see how sticky it is. It has been one of the few times that US inflation is higher than Indian inflation.
- Rising oil prices, increasing gold imports and India's trade deficit crossing US$15 bn which sucks out some liquidity.
- Supply bottlenecks leading to rising input costs.
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However, there is not too much connection between the economy and the stock market in the near term. The stock market was overheated and 10% correction yearly is the norm, and is welcome for longer term sustainability. We still have to see the effect of the new variant of Covid and whether there will be a temporary slowdown again in the economy. The October macro indicators were good:
- Net Direct Tax collection at Rs. 5.7 lakh crores, grew at 74% this fiscal.
- Service PMI figures were at a 58.4 - decade high.
- Diwali Festive Sale crosses Rs. 1.25 tn - breaks all records for a decade.
- Fiscal Deficit likely to be below FY 22 estimates, even though Government spending is up by 67%.
- Private Equity investments have surged.
- Corporate profitability has started rising and there are more upgrades than downgrades.
- Return on Equity set to hit an 8-year high.
- Corporate Balance Sheets have deleveraged sharply.
- Real Estate should support the economy.
" I would invest in India rather than the US, for the next 20-30 years."
Marc Faber, Swiss Investor based in Thailand
" ... If we had to own only one stock market globally for the next 10 years, and not be able to sell it in that period, that market would be India" Chris Wood, Global Head of Equity, Jeffries.
" Being the hottest Global market in both the listed and unlisted Worlds, India is literally on a roll!!! If I am betting on one country in Asia, it's India. If I am betting on 2 countries in Asia, it's India twice" John Chambers, Cisco Systems
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The fall in retail inflation levels may provide RBI with a much-required breathing space. The current improvement in inflation and growth may not be enduring in nature because of higher crude prices, and a slowdown due to increasing Covid cases in Europe and the unknowns with the new strain.
The RBI has embarked on a gradual exit from the prevailing loose monetary policy by reducing short term liquidity through measured increases in the Variable Reverse Repo Rate. Daily liquidity surplus is coming off and yields are gradually rising. At some stage rising interest rates are a very real possibility.
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There is a very real possibility of India being included in the Bond Index in the next few months. Taxation is the final hurdle to be overcome, and can be cleared by a determined Indian Government. Foreigners currently own merely US$ 15 bn. When we are included in the Index it would mean USD 30-40 bn in the first year and USD 10-20 annual inflows thereafter.
Hence, one can look at investing in Floating Rate (Short Term) and Dynamic Bond (Longer Term) funds, which should not be affected much by the rising interest rates.
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Gold peaked in 2011 at around US $ 1750 and then fell all the way down to about US $ 1000 in 2015 to recover back to that level and reach an all-time high briefly at US $ 1950 in August 2020.
There are 3 sources of demand for Gold:
- Investment in Gold ETF During the Covid period as liquidity was massive and equities were doing so well, the demand for Gold ETF fell. However, it is currently building up again.
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- Jewellery demand fell sharply during the Covid lockdowns - the Big Fat Indian Wedding is back - in November itself just Delhi had 1.5 lakh marriages.
- Governments normally buy 500 - 600 tons of gold. During Covid, they mainly bought their own bonds and had other priorities - but are now going back to normal gold purchases.
Gold is at the beginning of an structural up-cycle because of
- Massive currency debasement.
- Interest rates are low and real return is negative in both of the world.
- Inflation is going up.
- As mentioned earlier, demand for Gold is picking up again - supply is limited.
The price of gold is historically at 40% of the Monetary base and at that valuation should be at US $ 2550 and is currently around US 1800. Gold does well in periods of not both inflation and stagflation (high inflation with no growth).
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- Maintain your equity allocation - but at this stage, do not be overweight equity.
- Even with low yield, have some debt allocation.
- Increase your allocation to gold, as a hedge.
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WAKAD |
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MAGARPATTA |
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