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Good morning. In today’s edition: what’s the real story behind India’s growth slowdown; the family connection between Indian businesses; and polls close in the United States, counting underway. 

THE TAKE

Don’t Get Swayed By The Storytelling Around India’s Economic Slowdown

In an interesting column published in Mint this week, Sandeep Das, a former management consultant at PWC, pointed to the problem with finance influencers misleading India’s youngsters. The article highlighted that headlines such as ‘How I Made Rs 5 Crore In One Year’, target the insecurities of the younger generation, pushing them to speculate in the stock markets. Das wrote that influencers tap into multiple emotions such as fear, anguish, FOMO (fear of missing out) and even ridicule — “Do you still invest in fixed deposits?” — to influence young investors. 

Speaking of fixed deposits, it's a good time to bring up the report by the regulator Securities and Exchange Board Of India (SEBI) that highlighted that 9 of 10 individual traders lost money in the F&O market in 2024. So you would have been better off putting your money in a fixed deposit or even under your mattress, that’s only if you had the cash to start with and did not borrow it off a buy now, pay later app. 

Party Over

Thanks to influencers or otherwise, millions of youngsters have likely lost their collective shirts in the last few years. The precise impact may never be very known since the losses would be absorbed by families or longer loans. The outlets are many. People would have also lost money in cryptocurrencies or crypto trading. Others have lost and will lose money in the stock markets, for some it will be because they may not have the patience to wait for the markets to recover. Of course not all who have lost out are youngsters.

Some may lose higher amounts of money because they borrowed to invest and the interest rates are high and get compounded with delays. Whether it was for a now distant holiday or a high-priced smartphone, the true cost of money will be increasingly felt now. This was partly triggered by incomes not having kept pace with aspirations. 

Today, for a variety of reasons including regulatory actions, the party is ending or at least shrinking. Staying with the markets, it is clear that smart stockbrokers feasted on the general ignorance by creating content and luring more unsuspecting young users, through a pliable and amplifiable social media system. They continue to do so, many of them barely having seen a single full market cycle themselves. 

While the SEBI has woken up to the prospect of regulating the many get-rich-quick advice dispensers, not all are covered, including the stock brokerages, large and small. This is a good time to take stock, quite literally.

Time To Find The Real Story

When markets rise, as they did in the last few years, making money feels simple and is the equivalent of throwing a dart at any random point on the dartboard knowing you will hit a bull's eye. Smart investors wait precisely for moments like this.

Foreign portfolio investors saw the writing on the wall in late September when they realised companies were not going to turn in good results and that earnings-driven growth was going to fizzle out. Not surprisingly they have sold close to $11 billion by now. The amount is not large in proportion to their holdings which must be close to $800 billion or more, but it is the strategy that is noteworthy. 

As foreign investors have sold, Indian investors have continued to pump money, including substantial amounts through mutual funds. Not that Indian savers or investors have many choices in a high-inflation environment. Hopefully, the 8% correction which could go to 10%, if I go by some market strategists, will make us pause and think again about what it takes to make money.

While external factors like the US elections have some role to play in the medium to longer-term economic outlook, it has little to do with small cars not moving out of dealerships or the low-cost housing sector not doing well. We should try and find the real story and not get swept away by the storytelling.s. 

What’s Behind The Slowdown? 

Indeed if that were the case, then the slaves so to speak have tougher times ahead. Moreover, India’s economy is now moving quite literally in the opposite direction to the US, which is powering ahead with a pace of economic growth not seen in a long time. The reasons for slower growth in India range from a fizzling of the post-pandemic surge to a curtailing of consumption thanks to the triple whammy of heat waves, heavy monsoons and of course elections. This could only partly be the reason for the slowdown. Those who’re hoping that this slowdown is entirely because of the above reasons must be told that hope cannot be a strategy.

Despite the government amping up its expenditure in public spending — visible in areas like roads and railways — the private sector has not picked up the slack. This is not just in the last few months but several years. Data shows that both private spending on capital expenditure and private consumption are weak and staying so. Companies continue to do well because they are going all out to preserve their margins and profitability, including by downsizing as the IT companies did in the last year.

A Distortion Effect

The larger question remains, as I have pointed out before, is did we see this coming? And what could we have done differently?  Did the companies, who are now speaking of taking a hit because of urban consumption slowing down, not see this happening or the likelihood of it, six to nine months ago?  Did they not get a feeling that the consumption spike was more of a post-Covid phenomenon? Remember, developed markets were clearly accounting for post-Covid spending and thus could we be really different?

Then there is the financing of all of this. India’s central bank, the Reserve Bank of India for more than a year has been sounding the gong on rising risks in micro, personal and credit card loans and borrowings. Early signs of defaults were already there and the fact that higher than normal borrowing was funding this consumption of products, services and then speculation in the stock markets was quite evident.

There is a signal and noise problem in the Indian economy. The amplification of various data points at very high levels creates a distortion effect. This is not to blame those putting out the numbers but to caution those who look at them and worse, wrongly interpret them.

The question one can now pose is whether what we are seeing is cyclical or more secular slowdown. It is tough to answer this without more data. This data will have to include what really happened in the last four years so that we can focus on what to correct. Meanwhile, as we eagerly await the outcome of the US elections, we have to focus more on what is happening in our own economy.

DIVERGENT VIEW

‘Old Boys’ Club’: Indian Businesses Are Keeping Boardroom Positions Within Family And Friends

TVS Group chairman emeritus Venu Srinivasan and chairperson of the Pirmala Group Ajay Piramal on the board of Tata Sons; and managing director of Apollo Hospitals Sangita Reddy and co-chairperson of Forbes Marshall Naushad Forbes on the board of Bajaj Auto — these are just some examples of leaders of Indian family businesses on the boards of other family businesses.  

This phenomenon is typically Indian and there are many reasons for it, ranging from close social connections and marriages between these families. But is this necessarily a good practice?

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CORE NUMBER

Rs 6,970 crore

This is the total value of Rs 2,000 banknotes (discontinued on May 19, 2023) that are yet to be returned to the Reserve Bank India (RBI), according to the central bank's data. The RBI periodically publishes circulation updates on the withdrawal status of Rs 2,000 notes, and the October 1, 2024 data indicated that Rs 7,117 crores worth of these banknotes were still in circulation. As of November 1, 2024, this figure decreased to Rs 6,977.6 crores. According to a Mint report, 98.04% of the Rs 2,000 banknotes that were in circulation on May 19, 2023, have been returned. This means that Rs 3.56 lakh crores worth of Rs 2,000 notes were in circulation until May 19, 2023, have been returned.

FROM THE PERIPHERY

—🗳️ The counting for the US Presidential Elections is underway. The New York Times reported that while state race calls were streaming in, there was no clear leader at the moment. For now, Republican candidate and former president Donald Trump has won eight states including Florida. Democrat Kamala Harris has taken Maryland among other states. However, it is very early in the process and will likely take a few hours, and as we saw during the last elections could even take days. Reuters said that the race will ultimately depend on the seven swing states of Georgia, North Carolina, Pennsylvania, Arizona, Michigan, Nevada and Wisconsin.

—🚨India's Non-Banking Financial Companies (NBFCs) are facing financial stress due to regulatory scrutiny and rising loan defaults, especially in unsecured lending. Big names including Bajaj Finance, Shriram Finance, Mahindra & Mahindra Financial Services, and IIFL Finance all reported higher delinquencies in their second-quarter earnings, Bloomberg reported. Many NBFCs aggressively targeted retail customers to expand their loan books, fueled by high demand and fintech partnerships. However, the RBI's recent crackdown on risky lending practices has exacerbated the situation for these companies. RBI Governor Shaktikanta Das recently expressed concerns about the "imprudent" growth strategies of some NBFCs, prompting the central bank to halt new loans at four NBFCs.

—🏦The central government may consolidate the country's regional rural banks down to 28 from the current 43. If implemented, this would be the fourth such consolidation. According to a report by The Economic Times the government aims to streamline operations, optimise technology use, and enhance the capital base of these banks. The government’s goal is to achieve a "One State-One RRB" model, aligning each bank with its state's specific needs and characteristics while maintaining close community ties. This consolidation initiative comes at a time when the RBI is cracking down on unsecured lending among NBFCs due to rising Non-Performing Assets (NPAs) and bad lending practices.

—⛽India's diesel demand has stagnated, with October sales remaining flat at 7.64 million tons compared to the previous year.  In the first ten months of 2024, sales volume expanded by just 1.8%, marking the slowest pace since 2020 when pandemic lockdowns impacted demand, according to Bloomberg.  This trend contrasts with the growth seen in other petroleum products.  Gasoline sales surged by 8.4% to 3.4 million tons, while jet-fuel volumes increased by 8.6% to 751,000 tons.  However, analysts believe that the reasons for this shift could be multifaceted, ranging from economic slowdown to changes in consumer preferences and government policies.

— ⛈️ Amid deteriorating air quality, the Delhi government has sought for cloud seeding to tackle the air pollution problem. Cloud seeding is to generate rain by “seeding” clouds with salts. Reuters reported Delhi’s environment minister Gopal Rai as saying, “I appeal to the federal environment minister… now in Delhi and north India, the pollution has reached the border of 400… The next 10 days are quite crucial...help us get permission for artificial rain, call a meeting.” Delhi has been coping with bad air, as it does each year, since the end of October. A graded action plan usually involves closing brick kilns, stone crushers and harsher measures including stopping construction and manufacturing, harming businesses and employees alike.

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