A sharp decline below 6,050 was the first sign of trouble for the bulls. The markets reversed today and bulls will be in trouble, if Nifty closes below 6,160 tomorrow
The markets opened up weakly before trending downwards steadily through much of the morning and afternoon sessions. However, a surprise pull-back saw the markets recover ground and go over the crucial 6,150 support level during the final session of the trading session. The indices still finished in the red.
The S&P BSE Sensex opened at 20,875 and shortly touched an intraday high of 20,922 before immediately reversing and going down for much of the trading session. It touched an intra-day low of 20,589 before a remarkable pull-back saw the index close at 20,767 (down 97.09 points or 0.47%). Similarly, Nifty opened at 6,209, hit an intra-day high of 6,217 then reversed and hit an intra-day low of 6,116 before shooting up and closing at 6,178 (down 24.45 points or 0.39%).
The breadth of the market was poor. Out of 1,279 stocks, 535 were up, 636 were down and 108 were unchanged. The National Stock Exchange witnessed much higher volumes compared to the preceding three trading sessions with 71.73 lakh shares traded. As we pointed out yesterday, high volumes with no advancement after a huge rally signify weakness.
Most sectoral indices were in the red, with the notable exception of CNX PSU Bank index which finished strongly up by 2.69%. Finance, Media, FMCG, MNC and Bank Nifty were also in the green, albeit very weak.
Of the 50 stocks in the Nifty, the advanced to decline ratio was less than one, which saw 16 stocks advance and 33 decline and one unchanged. The top five gainers were Bank of Baroda (5.21%), GAIL (3.92%), Cipla (2.73%), State Bank of India (2.45%) and ACC (2.09%). The top five losers were Wipro Jindal Steel (-4.60%), Cairn (-3.80%), DLF (-3.14%), Sun Pharma (-2.99%) and NTPC (-2.25%).
The US data proved to be weaker than estimated with jobs data disappointing the markets. US September nonfarm payrolls were seen at 148,000 jobs added as against the estimate of 183,000. Perversely, the market interpreted this as a positive, because the US Federal Reserve would put off ‘tapering’ for now until employment numbers improve. On the other hand, on a more positive note, Spain has reportedly come off its two-year recession as it reported 0.1% expansion its gross domestic product.
But the biggest news of all was reports that China will tighten its monetary policy and this may have a cascading effect on the global economy in terms of demand and supply dynamics. Most Asian markets were sharply down with exception of Indonesia, Malaysia and New Zealand which were marginally up. Nikkei was down 1.95%, Hang Seng fell 1.36%. European markets, despite good news from Spain, were trading down as well, threatening their record run of nine consecutive days in the green. US futures were trading around 0.5% down.
Surely it is not, but was the outsized growth of the last 3-4 years goosed by a very loose fiscal policy and large capital inflows? If so, what would that mean for the stock prices of all these very richly valued consumer product companies?
At the outset, let’s make it clear that the argument is not whether 1.25 bn. people will consume or not. Of course they will. So what is the title all about? By the end of this article, attempt will be to at least convince you about the meaning and validity of the question. And the question will probably be best answered only as time goes by. Let us start off with a few data points.
Above is a random collection a few of the consumption stocks with their growth numbers over the years. These companies are by no means an exhaustive representation of the consumption basket, but are being used as indicators.
Depending upon their existing size and positioning within individual markets, companies had different growth rates before 2009. In some cases the growth rates were steady and in others trending down slowly. These stocks could have been part of various portfolios, but hardly the favourites.
At the same time, the absolute fiscal deficit number was stagnant and thus was trending down as a % of GDP, which basically meant that government financial health was in a very good shape.
But then as we all know came the global crash in 2008 and Indian government resorted to fiscal pump priming through tax cuts and humungous spending/ subsidies of its own. And that is reflected in the step up jump in fiscal deficit number in 2009.
Broadly in sync with what the government did, growth rates for most consumption companies picked up, dramatically in some cases. As government put more money in the pockets of consumers, a lot of it one time in nature, consumption boomed. While in Indian context, 20% growth of some companies may not look that huge, but at their size and segment domination, that itself is a huge number. Smaller companies benefitted disproportionately. Effect on profitability of all these companies, big or small, was even more disproportionate. All these companies have now become darlings of the investor community, with valuation multiples going up dramatically and through the roof in some cases.
But now as the fiscal chickens come home to roost, government spending is being rolled back wherever possible and tax authorities are pursuing every possible lead to recover as much in taxes as they can. And as government tries to control the absolute number of the fiscal deficit, inflation eats away at the real purchasing power of the spending that it is still managing to do. We are still running huge petro-product subsidies, not fully accounted for in the budget. Sooner than latter, they will be needed to be unwound.
And as this happens, growth rates of most of these companies have started to slowdown, in some cases dramatically. Coincidence?
What is not reflected in the government numbers is the effect of the 6th Pay commission on PSU companies. With schemes like NREGA etc, wage inflation was into double digits for better part of last three years. That added another engine to the consumption story, which was clearly not visible in the government fiscal numbers.
Stagnating capital expenditure could also mean casual labour may find wage hikes not coming through, not at least at the same rate with inflation still not having subsided yet. It could also mean that job generation will also be tough in the foreseeable future.
As the fiscal boost and its side effects wane and in fact inflation eats into them, are there other drivers in place to sustain the consumption demand?
Inward remittances also may have contributed to the consumption binge. They have gone up from around 40-45bn USD in 2008 to around 70bn USD. While that may look like 60-70% rise, in Rupee terms it may have more than doubled in this short time frame of 4 years. Countries in Middle East trying to spend their way out of internal strife and developed countries continuing to prop up asset markets may have had something to do with this steep rise in remittances. How these remittances shape up in future is anybody’s guess.
If the above analysis is reasonable, most drivers of the “consumption growth story” in India are basically derived out of the fiscal profligacy of the government, mostly Indian but partly foreign. Ideally fiscal boost should have been a temporary measure with government getting its act together to replace it with sound economics. That has clearly not happened.
While the structural India demographic story is debated very often, how does that convert into a structural consumption story without sound economic foundations?
There is an argument that the high interest rates are one of the big factors behind this slowdown. But interest rates were similarly high even in FY11 and FY12 and growth rates were good in those years. Good monsoon and upcoming elections may provide some relief but can they be source of sustainable demand is a big question mark.
So is the current slowdown in consumption is just a blip or was the outsized growth, in both revenues and profits, that we saw last 3-4 years a blip itself and we are likely to go back to much more sedate rates going ahead? And, if it is the latter, then what would that mean for the stock prices of all these very richly valued companies?
Coming back to the title, let me put all doubts and questions asked in the article in short, is the Indian consumption growth story just a “Fiscally Induced Consumption Tale In Overpopulated Nation”(FICTION) and can this FICTION now face reality successfully?
Bombay HC had asked IRDA to come up with package rates for 42 ailments based on policyholder’s sum insured and type of hospital. GIC has intervened to be part of the PIL. They have expressed difficulty in implementation of pre-packaged rates due to the lack of hospital regulator
The Bombay High Court (HC) has issued notices to 25 non-life insurance companies offering health insurance seeking pre-packaged rates for 42 ailments on the basis of sum insured and on the type of the hospital. HC had earlier directed Insurance Regulatory and Development Authority (IRDA) to come up with package rates for 42 standard ailments in the policy document. IRDA put the ball in health insurance companies court and hence General Insurance Council (GIC), a statutory body representing all non-life insurers intervened to made party to the public interest litigation (PIL) filed by activist Gaurang Damani on issues facing mediclaim policyholders.
According to Mr Damani, “If mediclaim policies indicated the amount an insured was eligible for specific ailments, it will ensure that they have clarity on which hospitals to go; the hospitals too would know how much they would get.” Packaged rate for standard procedures specified in the policy will force the insurance companies and third party administrators (TPAs) to become more transparent about what they are willing to pay, avoiding nasty surprises for the policyholder later. Today, going to preferred-provider-network (PPN) does not ensure complete coverage for hospital bill, even if there is no sub-limit for the said procedure and even when the policyholder has availed room facility within its room-rent limit.
GIC agreed that there should be uniformity in packages offered in insurance policies. They emphasised the need to have hospital regulator as there is no standardisation in the hospital charges. Mr Damani argued that there was a provision in the Clinical Establishments (Registration and Regulation) Act to appoint a regulator to regulate the hospitals. Unfortunately, IRDA has not appointed such an authority.
According to Mr Damani, “The good old cashless mediclaim days are no longer available with government insurers, who realised it was more expensive than reimbursement claims. There is no financial incentive to restart cashless facility. Information on package rates for 42 standard procedures will help policyholders know what they are entitled to. Today, there is lack of transparency and third party administrators (TPAs) have huge discretionary powers. Bills for same procedure undergone in the same hospital are settled with different amounts.”
The next hearing is scheduled for 28th November.