Markets Slip Again

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Good morning, it's Wednesday, the 16th of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.

The Take

Mumbaikars have reason to rejoice.

The Government has, in an evident pre-poll move, scrapped the toll for light motor vehicles at five toll plazas into Mumbai from Tuesday night.

The current toll was Rs 45 and had been rising steadily over the years.

The clamour for removing this toll in itself is not new and has been around for a few years.

The toll is collected by MEP Infrastructure, a private company to maintain 27 flyovers in the city of Mumbai and associated infrastructure.

The deal was awarded by the Maharashtra State Road Development Corporation (MSRDC) and would have expired in two years time.

There does seem to be a contractual breach and thus compensation which is a different story.

The larger issue is were people really asking for the toll to be removed ?

My sense is that as people hated the tolls more for the sheer inconvenience caused in terms of backed up traffic jams and time lost.

Not so much the Rs 45 paid as toll fees for the upkeep of roads.

Of course, you would rightly wonder why the quality of roads in Mumbai is so bad if you were paying all these tolls apart from all the other taxes. It is of course useful to note that this particular toll toll was not for the whole city, just the flyovers.

Tolls in India are a bane and more for the time lost in idling which is fuel burn in the hands and pockets of millions of motorists driving private or commercial vehicles.

There are not many studies on this that I could find but suffice to say that tens of thousands of crores were once computed as lost because of idling at toll plazas or backed up traffic.

The figure quite likely has fallen at least in proportionate terms over the years as the radio frequency tag system FAST Tag kicked in but am not sure about how much.

From my own experience it is common to get backed up at toll plazas because either someone does not have a FAST Tag but enters the FAST Tag line or they have exhausted their balance and the gate refuses to go up.

The reasons could be several but the delays are common.

Arguably, RFID based systems like E-ZPass in countries like the USA work more seamlessly and allow for cars to speed through.

The system also allows for leakage in my opinion.

In the E-ZPass system, if your account is not topped up, then you will get charged later whenever you do unlike here where you will be stopped and forced to pay cash.

And hence not having a toll at all is better than having one.

Because while the FAST Tags fixed the problem of revenue leakages, it only marginally solved the problem of ease of thoroughfare.

India’s road transport minister Nitin Gadkari has announced and now piloted a new system called the Global Navigation Satellite System or GNSS, a satellite based road toll collection systems which allows free travel upto 20 km daily in each direction on national highways and expressways and pay only for distance travelled rather than the distance between two toll points.

The GNSS based system, which also means no stopping at any toll point, is expected to start in April next year and eventually could replace the Fastag system.

If most vehicles run on GNSS systems, then quite likely toll plazas will not be needed at least in the current form.

There are lots of other savings there.

The time value of delays incurred on Indian roads has rarely been recognised as it has always been in private hands, whether individual or business.

While the disbanding of entry tolls into Mumbai city at various points is a welcome move, there should be an accompanying recognition of the cost of bad and poor roads on people’s time, business and lives.

And that brings us to the top stories and themes for the day:

Markets slipped again, Hyundai IPO partly subscribed.

Oil slides again, below $74 a barrel after kissing $80 a few days ago.

Why did the Nobel Prize for Economics go to its winners ?

Is Nariman Point making a comeback ?

Markets Slip

A fresh high on Wall Street did not help the stock markets back home as such, or prevented them from falling further.

The BSE Sensex and NSE Nifty 50 both rose in the morning to lose their gains later in the day.

The Sensex closed down 153 points at 81,092 while the Nifty50 ended at 25,057 down 71 points.

Somewhat predictably, in keeping with the frequent divergent theme, the Nifty SmallCap 100 Index and the Nifty Midcap 100 index were up in the positive.

China is losing some ground now, after the stimulus triggered euphoria that sent stock prices up in recent weeks.

On Tuesday, China stocks fell even as broader Asia-Pacific markets rose following in turn the highs on Wall Street that saw the Dow Jones Industrial Average and the S&P 500 hit records.

Mainland China’s CSI 300 dropped 2.66% to end at 3,855.99, while Hong Kong’s Hang Seng index was down 3.67% to end at 20,318.79.

China had posted disappointing September trade data after markets closed Monday, with exports rising 2.4% from a year ago and imports adding 0.3%, both sharply missing expectations, CNBC reported.

Remember, there is the Hyundai IPO overhang…for the Rs 27,000 crore mega IPO.

A report in Moneycontrol said the IPO has received 16% overall subscription so far, with its grey market premium (GMP) on the rise.

An earlier report in BS said the company had raised Rs 8,315 crore from anchor investors on Monday, at Rs 1,960 apiece, the higher end of its price band.

Oil Falls Sharply

Oil prices fell again demonstrating once again that the downward pressure on prices are higher than the other way around

This time it fell on reports that Israel may avoid targeting Iran’s crude infrastructure, bringing traders’ focus back to the International Energy Agency’s expectations of a sizable glut early next year, Bloomberg reported.

It is not clear to me whether Israel’s promises, if they were made, can be believed since that has not been the way events have progressed in the past.

The more important issue, for now, is the likely oil-market glut in early 2025, the IEA warned on Tuesday.

The agency made small cuts to its demand growth forecasts and said spare capacity in OPEC is near record levels, Bloomberg reported.

The Middle East is home to about a third of global supply and the market believes for now that Israel will avoid targeting Iran’s oil infrastructure which analysts told Bloomberg removes a big overhang for the oil market in the immediate term.”

The other downward pressure came from anticipated lower Chinese demand as the country’s highly anticipated Finance Ministry briefing over the weekend lacked specific new incentives to boost consumption in the world’s biggest crude importer.

OPEC itself has projected weakening demand growth, trimming its forecasts for this year and next for a third consecutive month, Bloomberg reported.

Battle Over Satellite Rights

Starlink CEO Elon Musk has said that opting to auction satellite broadband spectrum in India, rather than allocating it administratively, would be an "unprecedented" move.

Satellite broadband is to me a small segment of the market and out of the present cost parameters of most users though it is likely making news more because of who the players are rather what would be the products they could offer and the price they will charge.

Reliance Industries Jio wants spectrum to be auctioned while Starlink wants it to be allocated administratively.

Starlink has said that the spectrum in question has long been designated by the International Telecommunication Union (ITU) as shared satellite spectrum, advocating that its allocation should be managed "rationally, efficiently, and economically."

Starlink and other global players, such as Amazon’s Project Kuiper, are advocating for administrative allotment—a system where spectrum is assigned without an auction.

They argue that this method aligns with international best practices and would support the rapid development of satellite broadband services in India.

Business Standard is reporting that Reliance sent a private letter to the Telecom Regulatory Authority of India (Trai) on October 10, challenging the regulator's position and urging a fresh start to the consultation process. This letter has not been made public.

Potential satellite communication providers must be subject to the same rules as traditional telecom companies, said Sunil Bharti Mittal, chairman of Bharti Enterprises, on Tuesday.

Reliance claimed that Trai had "preemptively interpreted" Indian laws in favour of administrative allocation without fully consulting the industry.

Trai is currently conducting a public consultation on the issue. The stakes are high, given the massive potential of India's satellite broadband market.

Deloitte has projected the sector to grow by 36 per cent annually, reaching an estimated $1.9 billion by 2030, as reported by Business Standard.

Reliance Results Disappoint

Several brokerages have cut earnings estimates for Reliance Industries (RIL) after the oil-to-telecom conglomerate's quarterly results missed Street expectations, yet again, in the the July-September quarter (Q2) for financial year 2024-25 (FY25), Business Standard reported.

Some brokerages have also cut Reliance Industries (RIL) share price targets, factoring-in the sluggishness seen in oil-to-chemical (O2C) and retail verticals.

"O2C is facing headwinds with weak gross refining margin (GRM) benchmarks and regional petrochem margins,” some analysts have said..

On Monday, Reliance Industries consolidated net profit (attributable to owners) fell 4.8 per cent year-on-year (Y-o-Y) to Rs 16,563 crore, missing analysts' consensus expectations of Rs 17,200 crore.

RIL's consolidated revenue came in at Rs 2.31 trillion, missing the consensus estimate of Rs 2.34 trillion.

According to Bloomberg analysis, RIL has seen de-growth in net profit for a third straight quarter. Besides, this was the sixth quarter in a row when the firm missed brokerages' forecast.

Reliance results have of course to be seen in the context of oil prices which have been fluctuating quite sharply which affects margins of downstream businesses as well.

"Demand scenario for refining business has turned bearish over the last couple of months along with petrochemical margins; overall O2C prospects remain tepid for the next 12-18 months," pointed out ICICI Securities in a note.

Jio Platforms, on the other hand, saw an 18 per cent Y-o-Y surge in revenue; but retail business' revenue from operations dropped 3.5 per cent Y-o-Y.

Is South Mumbai Regaining Its Mojo

Since we broadcast from Mumbai, we are usually biassed towards issues concerning the city.

Having started my working life and career in Nariman Point, where India Inc once effectively ruled the country from, it was sad in some ways to see its decline as offices moved towards central Mumbai, BKC and then further northwards.

There are stories galore about the first moves by advertising agencies to Upper Worli, a place that did not really exist.

Meanwhile, Reliance who continues to be based in Nariman Point, moved its larger offices to New Mumbai or Navi Mumbai.

Over time, rental prices which had peaked at Rs 550 in 2007 started falling.

In 2018, rents were quoting at Rs 375 per square feet, in contrast to BKC at Rs 833 per square feet and NCR at Rs 460 per square feet.

The market for Nariman Point and thus south Mumbai now better connected thanks to a coastal road and an upcoming metro system is turning.

Top Rental prices in Nariman Point appreciated to INR 569 per sq ft by the first half of 2024, says a report from Knight Frank the real estate consulting firm, adding that between 2018 till H1 2024, top rental rates in Nariman Point have surged by 52%, significantly outpacing rental growth of BKC, where rents have grown by 20%.

In contrast, top rentals in Bengaluru and the National Capital Region (NCR) have experienced a decline, dropping by 4% and 7%,

respectively.

This rebound is driven by both an increase in demand for premium office spaces in traditional business districts and upcoming infrastructure projects that are enhancing Nariman Points connectivity and appeal.

Knight Frank is also working on projects in the area and has some interest in presenting a good picture but the rising rents do suggest some shifts.

Will it be a temporary phenomenon or something more lasting.

I spoke with Gulam Zia, Senior Executive Director - Research, Advisory, Infrastructure, and Valuation at Knight Frank and began by asking him what had changed in Nariman Point ?

INTERVIEW TRANSCRIPT

Gulam Zia: Well, to start with, since we started on South Mumbai or Nariman Point, let me say that I started my career in Nariman Point about 32 years back in a building called Makerfort. And from there to today, of course, we have seen a lot of churn, a lot of things changing. While in my current organization also, almost about 10 years I worked in Ballard Estate.

So overall, South Mumbai is where I must have spent at least 15 or 15 to 20 odd years of my 33, 34 years old span of career. And in this, something which is very evident that people have vacated the South Mumbai area because of a few key reasons. One, of course, it was location-wise, infrastructure connectivity was, you know, burdening a lot with a lot of people coming from far off suburbs, etc.

It was an inconvenience. Then the buildings were archived, very old plans, very old, you know, facilities, etc. And due to which the biggest issue was compliance.

Quite a few buildings caught fire. A few of the best known buildings in Nariman Point caught fire. In fact, one of the buildings that I was working when I was in Tata Housing earlier, the building caught fire and we had to change to another building.

So a lot of those reasons were behind almost kind of evacuation from South Mumbai to other locations in Mumbai. Other business districts were likes of, say, Lower Parel to start with, say Big Force. KPMG was the first one to move to Lower Parel.

A lot of them moved to BKC because BKC at that time was constructing swanky new buildings, etc. So there was, you know, a huge amount of that awe to be in a world-class kind of a building. So those who had the money moved to BKC.

Those who had a budgetary constraint either moved to Lower Parel or went to Andheri Kurla region. Of course, a few of them even went further off. Those who would have had their manufacturing facilities but maintaining a small office in Nariman Point then decided to take their offices also alongside wherever their factories were.

So that churn happened for a lot of reasons, I say, in lack of infrastructure, lack of good quality of buildings and so on. And that is what was the key reason for evacuation. And these are a few alternative at that point of time for people to move out and house themselves in different locations.

Govindraj Ethiraj: Right. And prices obviously reflected that change because in 2018, according to your report, prices were down to about 375 square feet for these. But you're saying that now and the peak was 515 in 2007.

So 2007 to 18 is perhaps at least from a price point of view where the decline took place. But you're saying that now it's on an and could hit about 569 rupees per square feet this year. So what's going to drive that or what is driving that?

Gulam Zia: A little anecdote. About six months back, I was talking to a very well-known hotelier and developer who relocated his office to South Mumbai. And he stays in Bandra around Pali Hill.

When I asked him a question, why this fall? He said, do you know Gulab, moving from Pali Hill to BKC takes me 45 minutes and from Pali Hill to South Mumbai takes me 25 minutes with the coastal road and the tunnels, everything ready. Imagine the difference.

A few kilometers into BKC, you take 45 minutes to enter. And that is the reason why we thought of understanding what is happening. If a few people are talking about a story like this, what else is going on?

So we started checking what's happening in the occupancies of South Mumbai and especially focusing Nariman Point, started analyzing the data. And that's when we realized that the growth of rent, say a building like Express Star, which is a representative of the best accommodation office building in Nariman Point, the rates have moved like in last four or five years, it has moved by 50-55 odd percent. And then we started comparing it with other business districts and realized that this is the best growth in recent years anywhere in the country.

And that's exactly the reason why we started pulling together all this data to talk about this, which nobody has yet spoken about, which is bouncing back of Nariman Point, revitalization of South Mumbai, you know, complete renaissance of what it was earlier, restoring the glory of the old Mumbai. And that's what this report is all about, Govind.

Govindraj Ethiraj: So now, I mean, demand in some ways I'm assuming is finite for office space or even if it grows, it will grow at a certain pace. Do you see that demand actually coming into Nariman Point because there are other parts of Mumbai, there is fresh demand in let's say Worli, Lower Perel, there's BKC, there's Andheri, there's so many parts which are still pulling. So how does Nariman Point stack up?

And of course, this question also I guess changes, I mean, there is an element of the new coastal road and that changes the dynamics as you pointed out.

Gulam Zia: Indeed. So first of all, let me just complete the infrastructure part of it. Do you know there are 11 infrastructure projects which are impacting or connecting Nariman Point with rest of the city, 11 and more.

So whether it is Atal Setu which is connecting on Eastern Freeway, Eastern Freeway itself and Eastern Freeway extension on the way to Mulund is right now under construction. So there are 11 odd projects which are impacting South Mumbai. And that is the key.

You know, when I spoke about and when this report came, some naysayers were bringing up to their feet saying that rest of the Mumbai is also improving because infrastructure. Mind you, this is the only place which is impacted by at least 11 infrastructure projects. You talk about western suburb, two metros, one connectivity here and coastal road there, not more than two or three in any other location, including BKC.

Of course, BKC also has the bullet train coming. But the impact of infrastructure on South Mumbai is the highest. And that is what now if I talk about demand, since the question was specifically about how is demand panning out.

Look, in last couple of years, the office space demand in the whole country has moved up. This year, we are going to see about 70 odd plus million square feet of fresh office supply absorption, which is almost 18 to 20 percent more than what happened last year. And that is happening purely because of the growth of India as an economy, requirement of office for it.

And Mumbai has always been the financial center of this entire growth of economy of the country. And hence, the absorption requirement of Mumbai has also been shooting up. Last year, for the first time, Mumbai was on 10 million odd square feet, which on an average, for years together, it used to do on an average about five, five and a half million square feet.

So there's a huge demand for new office stock. And of course, when we are talking about South Mumbai on an element point, we are not degrading or saying that the others will lose out. There will be business for a BKC, for a Worli, for the rest of them.

And there will be enough of demand for Nariman Point also. So let's understand that overall demand for the city exists because of the growth of economy and absolute upper end, the absolute over luxury, creme de la creme, would have more than BKC, one more location, South Mumbai, with its own heritage, its own history, its own culture, its own lifestyle, art and everything, which BKC lacks. And next couple of years, BKC shall suffer because a lot of construction work in any case is going on.

So overall, we feel there's a strong story for the bounce back of Nariman Point.

Govindraj Ethiraj: Right. And last question quickly, Gulam. So where is this fresh office stock coming into Nariman Point?

Gulam Zia: In the middle of Nariman Point, opposite the Assembly House of Maharashtra, there is a road on which there is 1.6 million square feet of new development coming up, which is owned by Mumbai Metro. And on top of a metro station, they are giving up this property for development. And mind you, the supply, the existing stock of Nariman Point is barely about 4 million.

So we are going to add almost one third or more of that existing demand in this one location. And that is going to be a key, absolute new, swanky new building is coming up. And mind you, rest of the Mumbai is also going through a complete makeover through redevelopment.

So when a redevelopment is happening in Juhu, Bandrag, Hartpooper, and so on and so forth, for a residential property, same is going to happen in Nariman Point as well. Many of these old buildings will be compelled to move and make way for swanky new skyline for two reasons. Number one is, as I said, the rents have increased, which means the values of the property in Nariman Point have shot up almost to the double.

And two, FSI, with Metro opening up, there is something called as TOD, Transport Oriented Development Corridor is coming up. So FSI of Nariman Point is already shooting up. So there's a strong reason for the whole of Nariman Point to undergo redevelopment.

Govindraj Ethiraj: Got it. Gulam, thank you so much for joining me.

Gulam Zia: My pleasure, Govind. Thank you.

Nobel Prize, What It Means

The Nobel Memorial Prize in economics was awarded to Daron Acemoglu, Simon Johnson and James A Robinson for their research into differences in prosperity between nations.

The three awardees “have demonstrated the importance of societal institutions for a country’s prosperity”, the Nobel committee of the Royal Swedish Academy of Sciences said, adding, “Societies with a poor rule of law and institutions that exploit the population do not generate growth or change for the better. The laureates’ research helps us understand why.”

The award was announced in Stockholm on Monday.

Acemoglu and Johnson work at the Massachusetts Institute of Technology while Robinson is a researcher at the University of Chicago.

The question I had of course was what can we take away from it, not just in India but anywhere in the world.

And if we could take away something here, what could that be?

I reached out to Madan Sabnavis, Chief Economist at Bank of Baroda and began by asking him about his views on the Nobel Prize winners’ work in inequality.

INTERVIEW TRANSCRIPT

Madan Sabnavis: So, actually, if we talk of the work which the Nobel laureates have done, for which they have been given this particular award, see, it's based on the fact that there is a lot of inequality which is there across different countries. Now, we're not talking of inequality within the country, we're talking of inequality between different countries. So, essentially, what we call the Western economies, developed economies, and the so-called emerging economies, and developing economies.

Their research has shown that there are basically two factors which have accounted for this kind of disparity, and this work has been done over a number of years. They're looking at, in fact, centuries to show that how their theory has really worked. So, what they have concluded is that there are two factors which determine the pace of growth and the reduction of this gap between the rich countries and the not-so-rich countries.

One is the form of governance. So, I think they believe that in case we have democracies, there is a better probability of countries being run in a better manner, and it's more kind of inclusive growth which we see rather than exploitative growth which comes when we have an autocrat. So, I think here, I think, for example, if we look at some of the African nations, for example, I think they're very rich in minerals, but most of them tend to be run by autocrats.

So, it is automatically a case of saying that whatever wealth exists in these countries are appropriated by the ruling class, and therefore, there is less left for the general public. So, that's the reason I provide this inclusive or exploitative things. The second thing is that, which is very much related to this concept of democracy and autocracy, is that in case we have very strong institutions, then the probability of growth tends to be much faster, much higher than in case we have weak institutions.

So, what are we referring to institutions? Essentially, it's a rule of law. Do we have a good judicial system?

Do we have policies in place which allow business to flourish? So, if you remember, in the ease of doing business, something which the World Bank used to talk about and has disbanded for quite some time, that actually gives a reflection about how strong institutions are, how easy it becomes for people to do business, and when investors are looking to put their money, they would like to look at countries which have these strong institutions. So, even in our context, for example, something like the IBC which we had, which is a resolution process, was something which really helps to build investor confidence.

So, I think these two factors, the form of government as well as the strength of institutions, are very much strongly related to one another, and that is what the differentiating factor when it comes to becoming a very rich country and a not so rich country.

Govindraj Ethiraj: The other question is, why would a prize like this, or rather this subject, be picked up at this point? Is there any reason for this, you feel, in what we see around us?

Madan Sabnavis: So, I'm not sure if it was planned out this way, because even in the past, we have seen that when Abhijit Banerjee and Esther got the Nobel Prize, it was more on the work on poverty. So, it's not always related to macroeconomic theory in the sense of financial markets, decision-taking, behavioural economics. So, I think it's a different kind of a subject which has caught the attention of the committee.

Given the fact that today there is a race to become rich by a number of countries, and that also includes India, since we are talking about becoming a developed economy very soon. So, I think that's where the focus of attention has shifted over how do you actually bridge the gap between the rich and the not so rich countries. So, of course, to be clear, we have to say that Nobel laureates don't give you a solution.

They only say that if you have a different kind of a governance structure, and you also have strong institutions, then the path becomes that much easier. It's not a solution they're providing, but yes, it's not prescriptive. But definitely based on their historical analysis, it does show that there is a reason for countries to focus on the institutional.

Govindraj Ethiraj: Is there any message here for enterprises, firms, individuals, and so on?

Madan Sabnavis: So, in terms of investment, I think firms will always be looking for countries which provide the right kind of an environment for investment. So, I'm saying this because ever since we had the Lehman crisis and we had quantitative easing, there was a lot of funds which were available which were invested in emerging markets. The funds have become a bit more discerning.

I think there are lots of choice which is there, number of countries which offer these opportunities, and they will naturally go to countries which provide the best opportunity. So, that is as far as foreign investors are concerned. In terms of domestic investors, they don't really have much of a choice, but they would ideally like to work in those sectors where there are fewer controls, where things are more liberal and more transparent.

So, that's what we have seen, that the moment it comes to anything which could have a lot of regulation, putting in money in form of investment is something where entrepreneurs think carefully compared to those sectors, say IT, for example, where there are fewer curbs which are there, you go there because everything is straightjacketed. So, that's what could be the message.

Inflation

On Monday, inflation numbers out showed them at 5.49% for September, its highest level in 9 months thanks to high food prices.

So much so that Reuters reported several economists saying they would like to see domestic rate cuts to be pushed back to next year from early December.

Inflation stood at 3.65% in August and was above economists' forecast of 5.04%.

I asked Madan Sabnavis about the latest jump in inflation numbers, what was causing it and what his outlook was ahead

INTERVIEW TRANSCRIPT

Madan Sabnavis: Well, I think the inflation number will remain fairly elevated even for the month of October. That's what our forecasts show, that we'll remain in this 5-plus range, 5-5.5% range in October, primarily on account of horticultural products, that's vegetables and even fruits, where the prices have gone up.

But this said, we have seen that even in terms of core inflation, based on personal care products, where we have seen the prices have been moving up and inflation has been fairly high, the reason being that input costs have been going up in the past, which were not passed on by the producers. Now, they are doing so. So, there will be an overall tendency for inflation to remain elevated.

And while RBI has forecast that for the third quarter of this year, inflation will be 4.8%, I think it will be slightly higher than that. But definitely far away from the comfort level of the RBI, because they're looking at 4%, targeting inflation of 4%. And for the year, they're looking at 4.5%. Q3 may not provide that kind of space for the NPC to think differently on inflation, since the numbers are going to be very high. And given the fact that when they do meet in December, they would only have knowledge of October inflation, not November inflation, they would actually be talking about the policy with the hindsight of 2-5%-plus numbers on CPI.

Govindraj Ethiraj: Madan, thank you so much for joining me.

Author:   Govindraj Ethiraj

A fresh high on Wall Street did not help the stock markets in India

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