Two contrasting growth stories

India watchers can be excused for turning schizophrenic. How else can they be expected to react, if, virtually simultaneously, they are presented with two wildly divergent views on the future prospects of the India Growth Story?

On the one hand, one had a significant new report from investment bank Goldman Sachs, ‘Modi-fied’ its stance on India, upgrading it to marketweight (investment grade), on the premise that a possible win for a Narendra Modi-led BJP will result in a turnaround in sentiment — and an to 10 per cent jump in stock prices.

At the same time, there was a more sobering indicator from HSBC, whose Purchase Managers Indices (PMIs) for both manufacturing and services sectors declined for the third and fourth successive month respectively.

“October data indicated falling levels of production and new orders in the Indian manufacturing economy, as the business climate within India remained tough,” the HSBC report said.

Another bull run?

However, the gloom in the ‘real economy’ — represented by the likes of the executives responsible for purchase and manufacturing decisions in over 500 companies which HSBC polls for the PMI — was overshadowed by the euphoria generated by the Goldman Sachs report, which appeared to indicate that the Indian stock market was set for yet another bull run.

And why not? The Goldman Sachs view is a powerful boost, not just for Narendra Modi’s election campaign, but for proponents of the India Growth Story.

After all, it was the same Goldman Sachs’ original BRICS report which had ignited the world’s imagination, turned attention to the emergence of new players in the world economic order, and helped channel billions and billions of dollars into the Indian capital markets. Of course, Goldman Sachs is not betting the farm on just Modi winning. It says it has also weighed in other factors, such as the pressure on the rupee easing with good foreign capital inflows, the turnaround in exports and a “cyclical pick-up” and “structural improvements” in the economy, with the resultant improvement in corporate earnings.

Now for the schizophrenic part. The HSBC report pointed out a further “deterioration” of business conditions in the country. “Reflective of a sustained reduction in order books, Indian manufacturers lowered their production volumes in October,” the report said.

Agent of change

In other words, while Goldman Sachs was expecting companies to do better, the companies themselves — according to HSBC — were expecting to do worse, and adjusting their decisions accordingly. HSBC’s survey participants said incoming new work and fresh orders also fell at a faster rate, with several participants commenting on “weaker demand” and a “difficult economic climate.”

Commenting on the India Manufacturing PMI™ survey, Leif Eskesen, Chief Economist for India & ASEAN at HSBC said: “Businesses continue to cut back purchases and a rise in inventories suggest that output will remain subdued. Input price inflation accelerated further despite the weak growth backdrop, as the effects of the depreciated exchange rate continue to pass through.

Saddled with additional costs, firms decided to lift output prices to protect margins. This suggests that the RBI has to continue its staring contest with inflation.”

But for Goldman Sachs analysts, the political optimism over a possible change of government appears to be clearly outweighing the gloom on the economic front.

“Current opinion polls suggest a higher probability of a BJP-led alliance forming the next government. Domestic equity investors tend to view the BJP as business-friendly, and the party’s prime ministerial candidate Narendra Modi as an agent of change,” its report said.

Clearly, the movers and shakers in the stock market appear keen for a change — and have already voted with their feet for the kind of change that they want. The hype surrounding the charismatic Modi, as well as the current government’s inability to either effectively counter his oratory in public forums, or manage the fallout on the common man because of slowing growth and rising prices, have meant that as far as the investment community is concerned, a change of government is a change for the better.

Surprise performer

It is partly this optimism which appears to have spurred the recent, and record-breaking, surge in stock prices. The benchmark BSE Sensex (the index flourishes, even if the exchange does not), hit an all-time high of 21,239.36 points in the special Diwali ‘Muhurat’ trading last Sunday.

It has been a surprise performer in an otherwise pervasively gloomy environment, topping even the record high achieved just before the Lehman Brothers crisis exploded and sent the world’s financial markets into a meltdown.

But it would be dangerous to read too much into the current market rally. Retail investors, who generally enter the market when they feel the future looks bright for them, have been exiting in droves. The number of retail ‘folios’ (investments) with mutual funds fell by a record 35 lakh in number in the first six months of the year, according to a CRISIL estimate.

The share of retail investors in the total funds managed by mutual funds (which are theoretically meant to be a retail investment vehicle) is just 19 per cent, with companies making up nearly half and ‘high net worth individuals’ making up the rest.

Even when the Sensex was at its record high, more than half the companies which make up the 30-share index were trading well below their individual record highs, with one, public sector power equipment maker BHEL, at just one fourth its record high.

‘Worst is over’

At the individual stock level, clearly, investors are seeing the real picture. BHEL’s stock price, for instance, reflects its stressed order book position, with activity in the power sector, particularly in new capacity addition, having come to a grinding halt in the face of a number of issues ranging from land acquisition to environmental clearances to tying up of fuel supply agreements.

But at the macro level, schizophrenia appears to be the order of the day. Finance Minister P. Chidambaram, for instance, declared that the “worst is over” for the economy and that he could see “green shoots” of revival everywhere. Just a couple of days later, president of the Federation of Indian Export Organisations M. Rafeeque Ahmed, lamented: “Consumption demand is hurting because of inflation and high interest rates. At the same time, investment demand is hurting because of general sentiment, the policy framework and the relatively high interest rates.”

In fact, everywhere one looks, dichotomies abound. Core sector numbers are up, but companies are cutting output citing power issues. Credit offtake is up, with infrastructure credit up 21 per cent in 2012-13, but infrastructure creation has fallen. The Sensex is up, but retail investors are fleeing. Agriculture is headed for a bumper harvest, but food prices are at record highs…

Perhaps the ‘Modi effect’ is caused by the fact that he has the ability, at least while he is on stage or on your TV screens, to make you look at just one thing at a time!

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