Markets Take A Fresh Pause On Selling
India’s GDP numbers are now set to be officially lower than what was earlier projected
On Episode 475 of The Core Report, financial journalist Govindraj Ethiraj talks to DK Joshi, Chief Economist at CRISIL. We also feature an excerpt from our interview with Dinesh Kanabar, tax expert and CEO at Dhruva Advisors.
(00:00) Stories Of The Day
(01:00) Markets pause
(04:15) Rupee recovers, rises sharply
(05:30) GDP growth slows, advance estimates show
(14:25) Car sales and their surprising fall
(16:07) Microsoft to invest $3 billion in data infrastructure in India
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, its Wednesday, the 8th of January and this is Govindraj Ethiraj, headquartered and broadcasting and streaming like always from Mumbai, India’s financial capital.
Markets pause on
GDP growth slows, advance estimates show
Rupee recovers, rises sharply.
Car sales and their surprising fall.
Microsoft to invest $3 billion in Data infra in India.
Markets Pause In Fall
India’s GDP numbers are now set to be officially lower than what was earlier projected.
The question is are the markets falling because they already know this, which is of course quite likely, or could they fall further because of the latest numbers.
We will come to the latest GDP numbers shortly but meanwhile the markets paused on Tuesday after diving on Monday.
The 30-stock Sensex added 234 points to settle at 78,199 while the NSE Nifty50 closed at 23,707.90 with gains of 91.85 points or 0.39 per cent.
The indices swung a fair bit during the day.
The Nifty Smallcap100 was up 1.35 per cent while the Nifty Midcap100 index ended with gains of 0.89 per cent.
While sales of consumer products and items are slowing down, jewellery continues to rise.
We spoke of Titan yesterday which saw a 25% rise in sales in the third quarter which is October to December 2024.
Now, Kalyan Jewellers is reporting at 41% year on year revenue growth, thanks again to strong festival and wedding demand.
There are some interesting trends within jewellery buying for example, studded jewellery.
But gold coin sales have also been strong, up 48% for Titan as revealed yesterday in reports while sales of plain gold grew 24 per cent.
This of course raises the larger question of whether the increased investment in gold is being driven as a hedge or as an investment, which is quite likely or because of the usual festival reasons.
China Resumes Gold Buying
Speaking of gold buying, China’s central bank has expanded its gold reserves for a second month in December, signaling renewed appetite after temporarily pausing purchases last year as prices soared, Bloomberg is reporting
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Bullion held by the People’s Bank of China rose to 73.29 million fine troy ounces in December, from 72.96 million in the previous month, according to data released Tuesday.
Significantly, China has resumed adding to its gold reserves in November after a 6-month pause.
The last big rallies we saw in gold last year which sent up gold prices eventually by almost 27% up last year including in India, making it one of the best asset classes to invest in.
Could there be a similar rise in gold this year ?
Well, global central bank buying is one trigger, domestic demand for various reasons is strong too and of course other assets classes like equities are not right being projected to be muted or slow.
Bloomberg says the China purchase shows the PBOC is still keen to diversify its reserves even with gold at historically expensive levels.
Rupee Rises
It is a relief, though am not sure to who all, to occasionally report that the rupee has not hit another alltime low.
This time, it logged its biggest one-day gain in more than a month on Tuesday as the dollar dipped towards a one-week low, boosting regional currencies, while foreign banks' dollar sales also helped, Reuters reported.
The rupee closed up 0.1% at 85.7125 against the U.S. dollar, its strongest daily gain since late-November.
The dollar index fell 0.3% to 107.9, while other Asian currencies rose between 0.2% and 0.9%.
Traders are speculating if incoming US president Donald Trump may not slap as high a tariffs on all imports including higher ones on countries like China, Mexico and Canada as he originally threatened.
The dollar has been rallying continuously for nearly three months, Reuters said, adding that relief for the rupee is likely to be temporary amid growing anticipation of weakness among speculators and hedgers.
Traders are also watching to see if there are more passive inflows into index-eligible (FAR) government bonds.
India GDP Officially Slows
India’s gross domestic product (GDP) estimates for financial year 2024-25 (FY25) have been maintained at 6.4 per cent, the Ministry of Statistics said on Tuesday.
This is of course significantly lower than the 8.2 per cent GDP growth reported in the previous financial year 2023-24.
A formal Government release said despite a dull first half of FY25, they expected an uptick in agricultural and industrial activity, along with resilient rural demand in the second half to keep India on a growth path towards achieving 6.4-6.8 per cent expansion by the end of the financial year.
"Real GDP has been estimated to grow by 6.4 per cent in FY 2024-25 as compared to the growth rate of 8.2 per cent in Provisional Estimate (PE) of GDP for FY 2023-24.
Nominal GDP has witnessed a growth rate of 9.7 per cent in FY 2024-25 over the growth rate of 9.6 per cent in FY 2023-24," Ministry of Statistics and Programme Implementation said in its official release.
Agriculture is the saviour.
The agriculture and allied sector has shown a significant improvement, with Real GVA growth estimated at 3.8 per cent in FY25, a marked increase from the previous year's 1.4 per cent.
Other sectors expected to grow are financial, real estate and professional services sector.
The construction sector's Real GVA is projected to rise by 8.6 per cent.
The good news could be that Private Final Consumption Expenditure (PFCE) at constant prices has experienced a growth of 7.3 per cent in FY25, a significant increase compared to the 4 per cent growth in the previous year.
Crisil Ratings Chief Economist D K Joshi said the decline in government capital expenditure, a key driver of post-pandemic recovery, during the second quarter is unlikely to be compensated for in the rest of the fiscal.
I reached out to him and began by asking him whether the numbers were any surprise..
INTERVIEW TRANSCRIPT
DK Joshi: Well, not really because I think after the second quarter GDP came in at 5.4%, I think immediately following that, a lot of professional forecasts cut their numbers down. Even RBI cut its forecast from 7.2% to 6.6%. Actually, it has come in even below that. Gradual slowdown was expected, but it turned out to be sharper than expected earlier because of the second quarter surprise.
But overall, this wasn't a surprise.
Govindraj Ethiraj: Right. And if you were to go a little deeper, one of the things that seems to be standing out is that agricultural growth has done better or doing better and some parts of industrial growth. So therefore, what's slowing down?
DK Joshi: Well, agriculture did well because last year, I think agriculture did not do well. So the base effect is playing out. Actually, agriculture should have grown even faster.
I think if the monsoons and the weather had been perfectly normal. The slowdown is one is in investments. So we all know that investments are being led by government investments and also by household investments.
We don't have the details, but we know that the government investment did slow down in the first half of the year. And I think that it's not easy to make up for that in the second half completely. Investments will pick up, but they won't make up.
So compared to the budget, you are going to end up with lower investments in this fiscal year. And since that was the important driver, so that also is behind the slowdown. The other factors like interest rate hike eping into some part of the demand in urban areas, high inflation leading to some consumption slowdown in some categories.
I think all that was on expected lines, but the sharper slowdown largely due to investment slowdown.
Govindraj Ethiraj: Right. And on the other hand, you've also pointed out that private consumption has done well. And this, of course, seems to be unlike previous quarters and year.
DK Joshi: Yes, I think private consumption has grown at 7.3 percent, which is above the GDP rate of growth, which is 6.4. But if you look at what happened last year, I think the base effects become an important driver of activity at times, just as higher than trend rate of growth in overall GDP last year is also a factor which led to slowdown because you can't maintain that high rate of growth. And similarly, last year we saw private consumption growth at only 4 percent. So over that, I think part of it is the base effect and part of it is the revival of rural consumption.
I think both of them have led to higher private consumption growth, which is about 60 percent of the GDP. So I think part of the rebound in consumption is the base effect. I think that's the point I wanted to highlight.
That is why it has grown faster than GDP. So if you look at investment, which was the driver of growth until now, it has grown as fast as the GDP. Private consumption has grown faster than the GDP.
Govindraj Ethiraj: But that in turn has been driven by rural consumption rather than urban, which continues to be muted.
DK Joshi: Rural consumption and base effect.
Govindraj Ethiraj: And urban consumption continues to be slow or muted?
DK Joshi: Relatively slower. I mean, those are the indicators because even the RBI survey tells us that the consumer confidence is a little muted and they measure consumer confidence only for urban areas.
Govindraj Ethiraj: Right. Slightly larger question. When we say that GDP slows down, in this case, let's say from an anticipated 7.5 percent to 6.5 percent or thereabouts, what does that mean tangibly or what could it mean tangibly?
DK Joshi: Well, I think this is, I won't call it a slowdown, a sharp slowdown at all. I mean, this is just a moderation in growth to the trend levels, I think, which is a trend. I think we estimate the trend or the potential at around 6.7 percent. So from above trend, it has come back to closer to the trend this year. I think that's how I would interpret it. And also, I think while interpreting these numbers, one should remember that these are the first advance estimates.
I think they are made available particularly for helping in the budgetary process. And they only account for three quarters of the data that is available. So if the fourth quarter surprises either way, the numbers can change.
So I think one needs to keep that also in mind. Although I think we'll need to see how the first, the second advance estimates which will come out in February. But one needs to keep this perspective in mind.
I think these are based on partial information.
Govindraj Ethiraj: Nevertheless, I mean, we're not saying it's a sharp slowdown, but if from a projection of 7.5, it becomes 6.5, something changes in the economy, or something that...
DK Joshi: Yeah, investments slowed down. So I think that is the whole point. I think the private investments are still tepid and the government investment slowed down faster than I think we were expecting.
So I think that is the lesson from this for the forthcoming budget would be that I think we need to maintain the thrust on public investments even in the coming budget because it's playing an important role. The spending from the government on infrastructure has higher multiplier effects. It is also helping you over time to bridge the infrastructure gap that we have in the economy.
So that is the lesson that I will draw that overall investment slowdown is because of public investment. And since private investment is not forthcoming the way it should, given the conditions, it's important for the government to keep the pedal pressed on the public expenditure. And I think slightly good news is that private consumption has somewhat revived.
I think I'm not talking about the distribution, but overall, I think the private consumption data shows has revised quite markedly.
Govindraj Ethiraj: Would there be any way of knowing what that private consumption is typically or otherwise?
DK Joshi: Not from this data. I think this data is totally aggregate. And I think so private consumption has both the services element and the goods element.
It is also by different income classes. I think we only have proxy indicators for that. We don't really know how it has behaved, except that I think auto was doing well last year.
This year it is slowing down. Services consumption seems to be doing reasonably well. Services growth is also quite strong, I would say.
So I think these are the broad conclusions you can draw. Very specific detail, I think you need to do more work on the information that is available, proxy information.
Govindraj Ethiraj: Right. And if you were to look at previous years and the advanced estimates that are released, let's say in this case, first week of January, do they usually end up being the same? And what is the likelihood of change, if so, in any direction?
DK Joshi: Well, I think it depends on the specific circumstances. And here, I think what can change the estimates positively is that if government investment actually picks up very swiftly in the last quarter, I think that can create an upside. If it doesn't do that, can create a downside.
So that's one way of looking at it. And when the COVID happened, I think there were other factors, how would COVID play out and so on. So actually, the point is that the more reliable estimate will not even be the second advanced estimates, but one that comes after that.
So I think sometimes you find that there's not much change, but sometimes there is change also. So I think it depends on specific circumstances. This year, I don't expect much change.
I mean, so if you were to ask my opinion, I would expect GDP growth around six and a half percent, I think.
Govindraj Ethiraj: Right. DK, thank you so much for joining me.
DK Joshi: Thank you very much for having me.
Car Sales Drop
Sales numbers from car dealerships across India were down a surprising 2% in December.
This is despite high year-end discounts which only helped some.
Sales dropped to 293,465 units in the month from 299,351 units last year, according to data from the Federation of Automobile Dealers Association (FADA).
At the start of December, about 80% of FADA's members had said in an online survey that they expected sales to be flat to higher for the month, recovering from a 14% drop in November.
However, demand failed to pick up in the final week of the month, which often accounts for 30-40% of a dealership's sales, FADA President C S Vigneshwar told Reuters.
"While some dealers benefited from year-end schemes and expanded product ranges, overall demand remained subdued," Vigneshwar said in a press release.
Dealers have struggled with tepid demand in the latter half of 2024 following two years of strong growth, forcing them to increase discounts.
Nonetheless, carmakers sales to dealers increased last month, most notably at market leader Maruti Suzuki, which reported a discount-driven rebound in small-car sales.
Car companies numbers were mixed, Mahindra’s SUVs did well, Hyundai was down while Tata Motors rose.
According to FADA, inventory levels are now down to 55-60 days in December from 65-68 days in November as manufacturers moderated dispatches.
This level is still very high compared to what the dealers want, which is 21 days.
A Maruti official said dealer inventory had significantly dropped.
Microsoft To Invest $3 billion in Data Infra in India
Microsoft will invest about $3 billion to expand capacity for artificial intelligence and its Azure cloud-computing services in India, CEO Satya Nadella said on Tuesday.
Executives ranging from Nvidia chief Jensen Huang to Meta's
chief AI scientist Yann LeCun have visited India in recent months.
Microsoft is planning to invest about $80 billion in fiscal 2025 on developing data centers to train artificial intelligence (AI) models and deploy AI and cloud-based applications, the company said in a blog post on Friday.
Investment in AI has surged since OpenAI launched ChatGPT in 2022, as companies across sectors seek to integrate artificial intelligence into their products and services.
Direct Tax Collections Down
A report from HSBC says that the current year, that's 24-25, started off with expectations of strong growth in tax revenues, and indeed by the end of the first quarter, tax revenues were growing 24% year-on-year and year-to-date. The worry, if any, was that spending would be high in an election year, leading to a slippage in the fiscal deficit target, which was budgeted at about 4.9% of GDP for the current year. But the HSBC report says that the tables have turned since.
Tax revenue growth has softened to about 11% year-on-year and year-to-date in November, which is the tax revenue growth budgeted for the current year, which leaves no space for manoeuvre. But more significantly, the report says that the fall in equity markets have started to hurt capital gains tax revenues, and their back-of-the-envelope calculations show that a third of the rise in the tax-GDP ratio in the previous year had been related to equity market gains. HSBC says that they still believe the 4.9% of GDP fiscal deficit target would be achieved, because expenditure remains rather weak, as opposed to income growing. Current spending is still strong, it says, but capex remains a laggard.
INTERVIEW TRANSCRIPT
Dinesh Kanabar: Two broad things which come up for 2024. One is we have seen a record number of IPOs and when you see record number of IPOs, not all of them are primary, many of them are also secondary and therefore, if I may say so, the record collections, direct tax collections are primarily as a result of some of those restructuring which has happened, money coming to the company, investors or other promoters selling their shares. Another is of course, the stock market boom and the money which people have made there.
As you rightly observed, if one looks at basically corporate tax, the profits have been quite muted and they themselves do not warrant a 20% increase, which is what we are seeing, but it's largely capital gains, it's largely everything happening on capital market side IPOs. So that's one part. If I look at 2024 and directionally, I think two, three things stood out.
First and foremost, whole thing in the budget where they scrapped the angel tax and I think that was one of the biggest, best moves that the government could do. It took number of years for that to happen, fair enough. You don't know and I can't tell you how many transactions which otherwise were getting stalled only because of this perception that will your valuation be accepted, not accepted and finally the government said, okay, it doesn't matter.
So that has been one very significant thing. The other thing which has happened in 2024 is that the Supreme Court has passed judgments in favour of the revenue and ostensibly some of them otherwise do not seem to make logical or legal sense, but it is only, so for example, there was this whole issue as to when could or up to what period of time could the government reopen assessments when the period was brought down. So when was the past law applicable, when is the current law applicable and if you would have gone to any legal counsel, not necessarily taking a view only for the SSEs, but the general really seemed to suggest that old matters can be revived etc.
etc. and the government issued some 19,000 notices and the Supreme Court came back to say that we cannot pass an order which negates all of this, all of this is legal. So what is seeing a trend where the Supreme Court is going on to say that we cannot frustrate the revenue and it's the first to try and collect taxes.
