Vivek Kaul: Why the stockmarket wallahs are suddenly worried about the economy

How do things look if we look at more recent quarterly consumption data? At the time of writing this, the latest period for which the private consumption expenditure data is available is the three-month period from April to June 2024. The growth in private consumption expenditure from April-June 2019 to April-June 2024 has been 4.1% per year.

Clearly, the Indian economy has had a consumption problem for a while as a large section of the population has struggled in the post-demonetisation, post-goods and services tax (GST) and post-pandemic world.

But those in the business of selling stocks, directly or indirectly, or if I were to put it slightly more creatively, those in the business of managing other people’s money (OPM), have refused to acknowledge this problem.

Now, private consumption expenditure as measured at the aggregate country level is a theoretical construct. But this slowdown in consumption growth was also visible in many other data sets that aren’t merely theoretical constructs.

It was visible in data sets like two-wheeler sales, subdued rural volume growth of fast-moving consumer goods (FMCG) companies, subdued smartphone sales, work demanded by households under the Mahatma Gandhi National Rural Employment Guarantee Scheme, and the number of people using railways for non-suburban travel.

But those in the business of managing OPM have refused to acknowledge this. There was a reason for it: We try to make sense of the world that we live in from our limited experiences and economic incentives. In the limited experience of the OPM wallahs, the Indian economy was doing well because the companies listed on the stock exchanges were doing well. At least that’s what they told us in public, though quite a few had a different opinion in private.  

If we look at the aggregate data for more than 5,200 listed firms, their net profit stood at 1.8% of India’s gross domestic product in 2018-19, before the pandemic started, down from a high of 5.8% of GDP in 2007-08. This net profit then fell to 1% of GDP in 2019-20. But then it bounced back to 2.8% of GDP in 2020-21 and 3.9% of GDP in 2021-22. In 2023-24, it was 4.4% of GDP.

In other words, listed companies started doing well, and hence, the Indian economy was doing well. QED.

But this increase in corporate profits was because of multiple one-time reasons.  

1) The Union government decreased the rate of corporate income tax in September 2019 in the hope that it would incentivize companies to invest and expand. This helped boost profits, but the hope of private investment picking up continues. 

As the Reserve Bank of India said in its latest State of the Economy report: “Private investment is showing some encouraging lead indicators, although the slack continues. Corporate results for the first quarter of 2024-25 had shown a deceleration in real gross value added by non-government non-finance companies." 

This is classic RBI speak: saying things without saying them.  

2) In the aftermath of the pandemic, RBI cut interest rates to very low levels. This helped companies pay lower interest on their outstanding debt, which helped boost profits.  

3) With the interest on bank deposits falling to very low levels, individuals tried to earn higher returns by investing in stocks. This sent stock prices soaring. As stock prices went up promoters sold shares and used the money to repay their outstanding loans, among other things. This helped companies deleverage. Also, their interest payments went down. That in turn helped boost profits.  

4) Revenge consumption of the well-to-do in the post-pandemic world also helped improve business prospects.  

5) Over the last few years—due to demonetization, the introduction of GST, and then the pandemic—a larger part of the economy has been formalized. That helped improve the business prospects of listed companies but at the cost of the larger economy.  

6) Higher spending by the Union government also helped listed firms. In 2018-19, total Union government expenditure was 12.3% of GDP. It jumped to 13.4% in 2019-20 and 17.7% in 2020-21. From 2021-22 to 2023-24, it stood at around 15-16% of GDP.  

All these reasons helped improve the prospects of listed companies. But now, they seem to be tapering out. 

Government spending in 2024-25 has been budgeted at 14.8% of GDP. This tapering has started to reflect in the results of listed firms. At the time of writing this newsletter, the net profit of around 1,100 listed firms whose results for the July-September quarter had been declared was down by 4.2% compared to a year earlier.  

Let’s now take a look at the growth in GST collections—a favourite among the OPM wallahs when they wanted to tell us that the Indian economy was growing by leaps and bounds. 

In September, GST collections grew by 6.5%, the slowest in 40 months, or since February 2021. This 6.5% growth also tells us that GST collections are more or less growing at the rate of inflation. 

From May to September, growth in GST collections was in single digits in four out of the five months, which wasn’t the case earlier. This is the single best indicator of the trend of listed firms benefiting from the increasing formalization of the Indian economy starting to taper out.  

Let’s now examine the domestic growth in car sales. According to data from the Society of Indian Automobile Manufacturers, car sales shrunk 1.3% in the July-September quarter as compared to the same period in 2023. Between April and September, car sales went up by 0.5% as compared to the same period in 2023, implying they have largely been flat.

These car sales data, though, reflect what carmakers ship to dealers across the country. The data does not represent sales to the actual buyer. For that, we need to look at car sales data released by the Federation of Automobile Dealers Associations (FADA).  

According to this data, passenger vehicle sales in the April-September period increased 1.1% compared to the same period last year. However, they fell by 18.8% in September compared to September 2023. 

Also, car manufacturers seem to have carried out a lot of channel stuffing—which refers to manufacturers shipping more cars to dealers than what end consumers are likely to buy.

As FADA puts it, car dealers face all-time high inventory levels of 80-85 days, equivalent to 790,000 vehicles worth ₹79,000 crore, due to aggressive dispatches by car manufacturers. These are cars which dealers would have tried to sell during the festive month of October.   

In fact, those in the business of manufacturing cars are acknowledging this slowdown. As R.C. Bhargava, chairman of Maruti Suzuki India Ltd, told The Times of India: “Affordability of cars is a concern." This was the explanation offered on car sales slowing down in 2024-25 after bumper growth in the two financial years prior.  

Meanwhile, two-wheeler sales, which are a much better indicator of private consumption in India given their lower prices, fell 8.5% in September, as per FADA data. Of course, a correct picture will emerge only after the festive season sales of Durga Puja and Diwali are factored in once the data for October becomes available. On the whole, two-wheeler sales from April to September are up by a little over 9%.  

Indeed, the OPM wallahs have started admitting that there is a consumption problem. One reason behind this is that the data that previously helped build a strong narrative around the Indian economy are not showing the same strength as they did before. 

What has also led to this change is some honest corporate speak. 

As Suresh Narayanan, chairman and managing director of Nestlé India, put it recently: “There is a top-end and people with money are spending like that is going out of style. The middle class of the country seems to be shrinking. The ones who are offering reasonable value in the middle segment are finding their fortunes temporarily shrinking." And it’s this so-called middle class that FMCG companies primarily cater to.  

In fact, even the ministry of finance, in its monthly economic review for September, said: “Urban demand appears to moderate due to softening consumer sentiments." Or as Rohit Jawa, chief executive officer and managing director of Hindustan Unilever Ltd, said in a recent conference call: “Urban growth has moderated." 

Jawa also said total FMCG volume growth had slowed slightly in recent months. Tata Consumer Products also talked about a demand softness.  

As Bloomberg pointed out in a recent report: “At least seven of India’s largest companies, including Reliance Industries Ltd’s retail arm and consumer bellwether Hindustan Unilever Ltd, have flagged softer consumption demand and a challenging operating environment in their earnings for the July to September quarter." 

Further, credit card defaults have gone up majorly, Bloomberg said.  

Given that the OPM wallahs are more focused on the urban economy, these statements and the weak data have got them worried. But the biggest factor forcing the OPM wallahs to focus on the country’s actual economic scenario is the fall in stock prices.

BSE Sensex, India’s most popular stock market index, reached its all-time high closing level on 26 September but had fallen by 7% as of 1 November. This was primarily on account of foreign institutional investors selling stocks worth ₹94,017 crore, in absolute terms—their highest ever in a month. 

Now, the OPM wallahs, whose job requires them to be seen in the media, need an explanation for this 7% fall, and it has to be a bit more than just FIIs selling Indian stocks. That bit more is the realisation or explanation that the Indian economy is not doing well on the consumption front. Given this, and not surprisingly, calls for RBI to cut interest rates and for the Union government to spend more than it has budgeted for are becoming stronger.  

So, what do we learn from all this? What’s the LinkedIn lesson that can be easily shared over a cup of coffee? Those in the business of managing OPM have, over the years, shown a reluctance in their thinking and speaking to separate the performance of the stock market from that of the economy.

Now, it would be stupid of me to say that everyone in the business of OPM does not understand the distinction between the stock market and the economy. I am sure there are enough who don’t, and many who have gotten carried away by the narrative they helped build, but there are also enough who do.  

So, why did they refuse to make this distinction in their communication over the years?

Before answering this question, let me ask you another question, dear reader. What do you think is the major function of the OPM wallahs? To manage your hard-earned money and help it grow? Perhaps. Or maybe not.  

Their major function is to keep talking and help build a narrative that will get prospective investors to invest in the financial firms they work for or run. And how do they do that? They sell you a story—a story that the whole economy is doing well and that the future will be brighter. 

A story that large parts of the Indian economy are not doing well although the stock market is does not make for a useful narrative. One, it lacks optimism. Two, it lacks coherence because it has some nuance built into it. 

In fact, one data point that anyone tracking the Indian economy should be worried about is the increase in the number of people working in agriculture. As per the government’s Periodic Labour Force Survey (2023-2024, from July 2023 to June 2024), the proportion of the labour force working in agriculture stood at 46%. It was 43% in 2018-19. The Economist estimates that  this implies an increase of 68 million workers working in agriculture.

The history of economic development tells us that countries go from being developing nations to developed nations by creating enough jobs that allow people to move from the agriculture sector to non-agriculture sectors, including the manufacturing sector. The opposite seems to be happening in India. 

What does it tell us? It tells us that people looking for jobs are finding more value in working in agriculture than in non-agriculture sectors. 

The trouble is that agriculture already has huge disguised unemployment. In other words, there are way too many people trying to make a living out of agriculture. On the face of it, they seem employed. Nevertheless, their employment is not wholly productive, as agricultural production would not suffer even if some of these people stopped working.

The stock market can keep going up, but this trend does not augur well for the Indian economy. Of course, the OPM managers aren’t listening to this, nor are the politicians or policymakers. But how do you solve a problem without acknowledging that it exists?