Nifty slid on India’s popcorn politics & economic slowdown

·         Although Govt may cut IT to boost private consumption, it may be too little as only 20M people pay any IT compared to 350M middle-class

·         GST reform and simplification along with restoration of price stability and improvement in the employment situation of the country is more important than cosmetic income tax cuts

·         The combined tax collection in India is now almost 19% of nominal GDP from 17% pre-COVID; politicians are more inclined to dole money politics to stay in power and earn cut money

·         The US  total tax revenue to nominal GDP ratio is also around 17%; personal income tax revenue is much more than the corporate tax due to the robust labor market and real wage growth

·         The US VAT rate is around 8% and China has 12% in a simple format (2-3 slabs) against India’s super complex GST weighted average rate of 12% (6 slabs from 0-28% with multi-sub-slabs)

India’s benchmark stock index, Nifty stumbled in the past few months on India’s ‘popcorn’ economic slowdown. Overall Nifty was down almost 2% in December (MTD) and 10% in the last three months on India’s worsening macros and growing political & policy paralysis. Indian Politicians & policymakers and even the Finance Minister (FM) are now more concerned about GST on various types of popcorn (salty, plain, caramel, etc) and used car trading. Modi admin is more preoccupied with marketing politics and political policies rather than planning & implementing required economic policies to bring the economy from slumber.

India’s discretionary private consumer spending is subdued, affecting overall economic activities due to the skyrocketing cost of living. There has been no price stability in India for at least the last 20 years under both UPA and NDA despite elevated borrowing costs. The average headline CPI is around +5.0% for the last two decades, which means over 100% price rise in the last two decades.

Also, average food inflation is around +10.0%, which translates to over 200% price rise of day-to-day food items in the last twenty years on average. This along with increasing costs of fuel/transport, various taxes in the name of development, higher costs of healthcare/medicines, private education, and housing costs, the minimum comfortable cost of living in India is now around almost INR 85000/M; i.e. almost $1000/M for a small family of three (middle-class household). This is against average gross earnings of INR 45000/M in India.

Moreover, over the last few years, especially after COVID, both Federal and State governments have increased/modified various GST rates for both day-to-day items & services and so-called luxury items & services. The present format of GST is very complex and rates are also on the higher side, resulting in higher costs of goods & services and subdued consumer spending.

Overall, India's present economic slowdown can be attributed to a combination of domestic structural, cyclical, and external factors:

·         Higher cost of living (inflation): Rising inflation, particularly in food, fuel, and essential commodities, has reduced consumer purchasing power and affected consumption demand; the elevated levels of price rather than the rate of price increase (inflation) is curtailing demand. Higher cost of transportation fuel, and edible oil because of higher domestic taxes is also affecting core inflation and overall consumption.

·         Devalued local currency (INR) and higher imported inflation: USDINR soared almost 89% from around 45 in 2004 to 85 in 2024; India is an import-oriented economy in terms of fuel, food, and various other commodities along with industrial & consumer goods. Higher USDINR along with higher tariffs and other taxes is causing higher imported inflation, which is a legacy issue.

·         Elevated unemployment/under-employment: India’s average unemployment rate has been around 8% for the last 20 years; actual unemployment/under-employment may be around 25% and the youth unemployment rate is around 50% due to a lack of adequate quality jobs for millions of skilled/semi-skilled labor force; mismatch between education, skill, jobs available and rampant political corruption in almost all public exams and jobs.

·         The economic slowdown has resulted in increased unemployment rates as businesses become cautious about hiring amid economic uncertainty. This has further reduced consumer spending power, creating a vicious cycle that hampers recovery efforts.

·         Stagnated real income growth: Indian private sector employees are not getting meaningful real wage growth due to job insecurity, an abundance of the semi-skilled labor force (more supply than demand); also most of the Indian private establishments/corporates and political parries (NDA/IND) are not interested to implement higher minimum wage law as corporates have to contribute to political/election funding in a significant amount. No business/corporates will pay political parties out of their pocket and thus they don’t hesitate to increase the prices of their products & services with possible cost-cutting at all fronts, especially the wage of employees, which is under their control.    

·         Weak consumer confidence has led to a reduction in spending, which is critical as private consumption accounts for about 55-60% of India's GDP. Factors such as rising cost of living and decreasing disposable incomes have made consumers more cautious, further exacerbating the slowdown.

·         Weak Private Consumption and Demand: Both urban and rural discretionary consumption is affected due to higher cost of living, weak labor market and also due to poor agricultural output amid adverse weather events in various parts of the country.

·         Private Investment (CAPEX) Stagnation: With consumer demand slowing, companies/producers are hesitant to expand capacity or invest in new projects; subdued private CAPEX is a legacy issue in India due to tepid consumer demand and higher borrowing costs; also higher RBI rate for too long time is affecting consumer spending, while retail NPA is rising; tepid private CAPEX means subdued job market

·          Financial Sector (NPA) Stress: While corporate NPAs in banks have improved in recent years, the stress in the financial sector, particularly among non-banking financial companies (NBFCs), has constrained credit flow to small businesses; overall unsecured personal, business and consumer durable loans are stressed resulting in cautious approach by banks & financials to extend fresh credit; all these are causing tepid discretionary consumer spending

·         Policy and Structural Reform Challenges: Certain key reforms, such as labor and land reforms, remain partially implemented, affecting the ease of doing business and industrial growth.

·         GST Mess: Due to the hurried implementation of GST in 2017, India’s Goods & Service Tax has practically turned into a ‘Gabbar Singh Tax’ (Goonda/Mafia tax) rather than a ‘Good & Simple Tax’. India’s GST, in its present form, has multiple tax slabs with multiple varieties for the same product (like three different GST rates on three varieties of popcorn). Higher GST rates, complex structure, and various regulatory hurdles increase the overall cost of compliance for MSMEs and SOHO segments, making it unfeasible for a small business and the informal economy, which usually employs a significant informal semi-skilled workforce.

·         For example, imposing GST on FSI charges could increase housing prices by 10%, and adversely impact demand. Developers said that such additional charges will make affordable housing projects economically unviable, potentially pushing the prices upwards by 7-10 percent and directly impacting the purchasing power of the middle-class segment.

·         The same is true for the automobile industry; extremely high taxation like GST on new and also old cars, and high rates of other regulatory charges (insurance, road tax, tax, EMIs, parking fees, etc) make taking ownership of the car unaffordable for a middle-class family; better he will prefer an Uber (app taxi).

·         Regulatory and political hurdles: Overregulation in almost every other sector has deterred private-sector growth; although the old ‘License Raj’ was abolished, it was replaced by the unofficial ‘political and bureaucrat raj’; In India, it’s almost impossible to run even a small business without keeping political and officials/bureaucrat bosses in good mood.

·         High energy cost: India’s energy/electricity cost is relatively higher not only for households, but also for business, which is affecting India’s competitive advantage of merchandise exports to other efficient exporters like China, Vietnam, and South Korea; also high energy costs are causing higher prices for domestic goods & services. Although Russia supplies India with oil at a big discount (20% lower than the global price), the Indian government is collecting various taxes for revenue rather than passing the benefit of lower global oil prices to the economy and domestic consumers.

·         Global Economic Challenges and Potential Trump Trade War 2.0: Slowdown in Global Trade; Weakened demand globally, partly due to lingering geopolitical tensions & fragmentations, and the residual effects of COVID are affecting India’s merchandise export, despite robust service export-led by IT/software. Looking ahead, as Europe/EU is now in an economic slowdown (stagnation), and Trump trade war 2.0 is set to take center stage in 2025-29, India’s exports may be affected more.

·         India's export growth has stagnated, partly due to a global slowdown and increased competition. The value of merchandise exports has not only stagnated but also decreased in recent years, impacting overall economic performance.

·         Supply Chain Disruptions: Global supply chain issues due to the lingering Ukraine and Gaza war especially in key sectors like electronics, pharmaceuticals, and automobiles, have impacted production and trade (even after COVID). Russia-Ukraine war causes disruptions in fertilizer imports have impacted inflation and agricultural productivity. Overall geopolitical tensions and subsequent sanctions are causing global supply chain disruptions and India is also facing various issues.

·         External Trade Imbalance: India's high dependence on imports for electronics, energy, and machinery, has widened the trade deficit, boosting USDINR and also imported inflation. Limited diversification in export markets has also reduced India's competitiveness on the global stage.

·         Lingering Impact of COVID: The pandemic led to prolonged disruptions in many sectors, particularly MSMEs (micro, small, and medium enterprises), and these businesses are still recovering. Many workers in the informal economy have not regained their pre-pandemic livelihoods, affecting overall consumption and economic activity.

·         Structural Weakness in Employment: The mismatch between the demand and supply of skilled labor, combined with the slow pace of job creation in the formal sector, has led to a weak labor market; elevated youth unemployment is also causing frequent social stability issues across the country, especially in underdeveloped East Indian state like Bihar, WB, etc.

·         Climate Change Effects: Erratic weather patterns have led to inconsistent agricultural output, hurting rural incomes and the overall economy. Also, India’s excessive reliance on fossil fuels has worsened its environmental impact, affecting the health of the general public and the overall cost of living.

·         Public Debt and Fiscal Challenges: Rising fiscal deficit and government debt have limited the government’s ability to stimulate the economy through large-scale spending or fiscal stimulus.

·         Inadequate public infrastructure: India’s inadequate and poor state of public infrastructure compared to its huge population of almost 1.445B is causing a higher cost of living from private education, healthcare to airlines.

·         Decline in Private consumption and too much reliance on Government consumption:: India’s growth story is too dependent on government consumption (including CAPEX) rather than private, especially after DEMO (demonetization) and RBI AQR (asset quality review); too much reliance on government consumption/spending is causing higher public deficit, higher debt and higher currency devaluation.

·         Hoarding of gold: As the Indian public is not allowed to carry or transact in FX/USD and deposit in Banks, Indians are trying to hoard gold to hedge against INR depreciation (apart from the Gold ritual). After COVID, many stressed Indians are now again selling Gold to cover income deficiencies and higher cost of living.

·         Agricultural Crisis: India’s agricultural sector faces significant challenges, including dependency on monsoon rains and low productivity compared to non-agricultural sectors. This has led to rural distress and further reduced consumption levels in rural areas, contributing to the economic downturn.; rural labor force migrated to urban areas for jobs, which resulted in tighter rural labor markets lower food/crop production, and higher food inflation.

·         Policy-Induced Factors: Past policy decisions, such as hurriedly implemented demonetization (DEMO) and the Goods and Services Tax (GST), have also played a role in the slowdown. These measures have been linked to a drop in aggregate demand and have created hurdles for businesses, particularly affecting small and medium enterprises (MSMEs).

·         Inadequate Infrastructure: Persistent issues with infrastructure development, especially in the transportation and energy sectors, have hindered business competitiveness both domestically and internationally. Poor infrastructure limits growth potential across various industries.

In summary, India's economic slowdown is multifaceted, driven by internal policy challenges, declining consumer confidence, investment hesitancy, agricultural distress, and adverse global conditions. Addressing these issues will require comprehensive policy reforms aimed at revitalizing growth and restoring investor confidence. To address the slowdown, India needs a multi-pronged approach that includes addressing structural inefficiencies, implementing growth-friendly structural & policy reforms, boosting private investments, and fostering innovation and exports. Immediate measures to improve rural demand, ease inflationary pressures, and enhance job creation are critical for long-term growth recovery.

Now after realizing slowing economic activities and GST mess, the Modi admin may bring out some tax cut sops in the FY26 Federal budget to be tabled by the FM on 1st Feb’25. The prime objective is to keep India’s growing middle class in a good mood and provide some tax cuts to neutralize high GST taxes to some extent and boost discretionary consumer spending.

The Indian government may cut some direct and indirect taxes in FY26:

·         FY26 Federal budget will be presented on 1st Feb’25, which may have direct and also indirect tax reform/simplification plan

·         India’s combined (Federal+ State Govts) tax (direct+ indirect) revenue is now approaching 19% of nominal GDP in FY 25/26 against pre-COVID 17%

·         India’s combined tax revenue was around INR 54.77T in FY24 and projected to be around INR 61.61T by FY25

·         India’s combined tax revenue is growing around 12.50% on average against nominal GDP growth of 10%

·         The personal income tax collection estimate for FY24 is around Rs.11.56T vs 10.22T in FY23 and 8.33T in FY22.

·         The corporate tax revenue estimate for FY24 is around Rs.10.42T vs 9.23T in FY23 and 8.26T in FY22.

·         Combined indirect tax revenue for FY24 is estimated to be around Rs.33.77T vs 29.72T in FY24 and 26.30T in FY22.

As of December 31, 2024, India's income tax structure offers taxpayers the choice between two regimes: the old tax regime, which includes various exemptions and deductions, and the new tax regime, introduced in 2020, characterized by lower tax rates without most exemptions.

Additionally, individuals with a total income up to Rs. 7 lakh can claim a tax rebate under Section 87A, effectively resulting in zero tax liability for those earning Rs.727770.00 under the new tax regime; i.e. a person earning up to Rs.60647.50 per month (~700$), need not to pay any income tax (new regime).

Changes Introduced in Aug’24 for the interim Budget for FY25:

In the recent interim Budget for FY25 presented in Aug’24 (after the June’25 election)  no significant changes were made to the income tax slabs compared to the previous year. However, some adjustments were introduced to enhance taxpayer relief:

·         Standard Deduction (SD): Increased from Rs. 50,000 to Rs. 75,000 for salaried employees

·         Family Pensioners: The standard deduction limit raised from Rs. 15,000 to Rs. 25,000

·         NPS Contribution: The deduction limit on employer contributions to the National Pension Scheme (NPS) increased from 10% to 14%

Potential tax Modifications in the Upcoming FY26 Budget:

Recent reports suggest that the Indian government is considering further reductions in personal income tax rates to boost consumption and provide relief to the middle class. Specifically, there is contemplation of reducing taxes for individuals earning up to ₹1.5M. These proposed changes aim to increase disposable income for middle-class taxpayers, thereby stimulating demand and contributing to economic growth.

·         Economic Conditions: The Indian government's assessment of economic growth and inflation rates could lead to adjustments in tax policies aimed at stimulating private consumption and investment.

·         Public Sentiment: Growing public (middle-class) demand for tax relief could prompt revisions in tax slabs or increased rebates.

·         Fiscal Health: The government's fiscal position and revenue targets will play a crucial role in determining whether any cuts or modifications are feasible.

·         The Indian government (Modi-3.0) may increase the standard deduction from the present Rs.75000/- to Rs.100000-150000/-, effectively making yearly income up to Rs.1000000 (1M) tax-free from the present Rs.0.7M.

·         Government may also club income slab above Rs.1M to 1.5M under one slab of 10%; above 1.5M to 2.5M @15%; above Rs.2.5M to 5.0M @25% and above Rs.5M @30% in the new IT regime; accordingly the old IT regime may also be tinkered.

·         On indirect tax, the Government may also reduce taxes/ED/Cess on transportation fuel to ease the inflationary impact.

·         The government may also abolish STT, while may also tinker with capital gain tax.

Modi admin may be planning to provide an overall fiscal stimulus of around Rs. 2T/year tax cuts, which may be covered through increasing GST collections from the present rate of around Rs.1.80T/M to around Rs.2T/M.

On 30th December, the Federation of Indian Chambers of Commerce and Industry (FICCI) outlined several key recommendations for India's Union Budget for the fiscal year 2025-26 (FY26). These suggestions aim to bolster economic growth, enhance ease of doing business, and promote sustainable development. These recommendations reflect FICCI's commitment to fostering a conducive environment for sustainable and inclusive economic growth in India. Influential FICCI has outlined a comprehensive wish list for India's FY26 budget, focusing on enhancing economic growth, infrastructure development, ease of doing business, deregulation, and simplifying the tax regime.

India’s FICCI recommended:

·         Increase in Government Capital Expenditure (Capex): FICCI proposes a 15% increase in capex over the previous fiscal year to sustain growth momentum amid global uncertainties. This would involve significant investments in physical, social, and digital infrastructure to drive economic progress and ensure balanced development.

·         FICCI has proposed a 15% increase in capital expenditure (capex) for FY26, aiming to boost infrastructure investment and maintain economic growth momentum. This would raise capex from the previous year's estimate of Rs. 11.1T to approximately Rs. 12.8T.

·         Implementation of Next-Generation Reforms: To facilitate reforms in key areas such as land, labor, and power which are in the state domain, FICCI suggests creating inter-state institutional platforms similar to the GST Council. These platforms would aid in consensus-building and advancing reforms critical for long-term growth.

·         Infrastructure and Investment Reforms: FICCI advocates for next-generation reforms in land, labor, and power sectors through inter-state institutional platforms similar to the GST Council, aimed at bolstering investment and ease of doing business.

·         Simplification of the Tax Regime: FICCI recommends rationalizing multiple Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) rates into a simpler two- or three-tier structure to avoid classification disputes and prevent the blockage of working capital. Additionally, they suggest eliminating TDS/TCS on transactions subject to GST, as relevant information is already available through GST filings.

·         FICCI has emphasized the need for a simplified tax regime, advocating for the rationalization of multiple TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) rates into a simpler two or three-tier structure. This aims to enhance compliance and reduce litigation.

·         Income Tax Relief: FICCI has urged the government to consider reducing income tax rates for individuals earning up to Rs. 1.50M annually, which could provide significant relief to middle-class taxpayers and boost private consumption.

·         Establishment of an Independent Dispute Resolution Forum: To reduce litigation related to direct tax matters, FICCI proposes introducing a new forum comprising independent experts, such as retired judges or experienced professionals, to handle disputes at the assessment or post-assessment level. This initiative aims for effective and time-bound dispute resolution.

·         Promotion of Sustainability (Green Economy): FICCI emphasizes the need for an enabling policy framework targeting both green and transition areas to meet India's net-zero emission targets by 2070. Recommendations include developing Carbon Capture, Utilization, and Storage technologies, creating pathways for green transitions across sectors, launching a national vision document for the circular economy, and reviewing the Priority Sector Lending framework to include climate adaptation and mitigation activities. The FICCI wish list includes a coordinated approach towards achieving India’s net-zero target by 2070, emphasizing sustainability in economic policies and practices including the promotion of green hydrogen.

·         Support for Women's Participation in the Workforce by offering tax incentives: To enhance women's workforce participation, FICCI suggests providing specific tax exemptions for daycare expenses and utilizing Corporate Social Responsibility (CSR) funds to establish dormitories for women/children in manufacturing hubs. Additionally, creating a statutory body to certify and monitor daycare centers is recommended. FICCI has highlighted the need for policies that support increased participation of women in the workforce, which is crucial for sustainable and inclusive economic growth.

·         Self-Reliance in Defense: FICCI advocates for prioritizing domestic production in defense procurement, investing in advanced technologies such as AI and quantum computing, and establishing a Defense Export Promotion Agency to boost India's position in global defense markets.

·         Agricultural Productivity Enhancement: The establishment of an agricultural yields mission targeting the bottom 100 districts and launching a national program to train 3 million farm technicians over the next five years is among FICCI's suggestions to improve farm incomes and productivity.

·         Encouragement of Domestic Electronics/PCB Manufacturing: To reduce dependency on imports, FICCI recommends developing a roadmap for local manufacturing of components, such as Printed Circuit Board Assemblies (PCBAs), to strengthen India's electronics manufacturing ecosystem.

·         Enhancement of Primary Education: FICCI proposes launching a Prime Minister-led national campaign to promote foundational literacy and numeracy, offering subsidy vouchers to parents for private school fees, and fostering competition among educational institutions (private & public) to improve early years' education across the country.

·         Increased Allocation for Healthcare: An increase in healthcare allocation from 2.1% to 2.5% of GDP is suggested to strengthen healthcare infrastructure and move closer to Universal Health Coverage goals. FICCI also proposes doubling the deduction for health insurance premiums under Section 80D of the Income Tax Act to ₹50,000. Additionally, it recommends increasing the current deduction limit for preventive healthcare expenses from Rs. 5,000 to Rs. 20,000.

·         Immediate Consumption Boost: FICCI Suggestions include introducing consumption vouchers (subsidies) targeted at lower-income groups to stimulate immediate spending and address food inflation issues.

These recommendations reflect FICCI's strategic focus on fostering an environment conducive to economic recovery and growth as India navigates post-pandemic challenges while preparing for the upcoming budget presentation on February 1, 2025. In summary, FICCI wants tax cuts and also targeted fiscal stimulus/grants to revitalize the Indian economy after the GDP shocker for Q2FY25.

India needs to spend much more on infra (traditional and social) to cope with huge demand from a huge population and increasing middle class:

·         India’s combined (Federal +State +PPP) CAPEX (traditional infra spending) is now approaching around INR 30T/year, almost 10% of nominal GDP

·         India may spend around INR300T (~3.6T$) over next 10-years (PPP)

But India has to also take care of detreating fiscal math amid the increasing inclination of all political parties to indulge in dole money politics to buy votes for cash and stay in power to earn from political corruption.

·         Combined public debt & liabilities (PDL) is now around 85% of nominal GDP

·         The combined fiscal deficit was around 8.6% of nominal GDP in FY24

·         Federal fiscal deficit was around 5.6% in FY24 and estimated to be around 5.0% in FY25

·         Federal net interest payment on PD to core tax revenue is around 45% (Red Flag)

·         The combined net interest payment on PD to core tax revenue is around 29% (Red Flag)

·         India’s overall fiscal math is moderately in the red flag line zone as PDL is increasing around +13.5% against core tax revenue of 12.5% and nominal GDP growth of +10.0% on average.

Indian real GDP may need to grow in double-digit rather than the 6% average trend for the last two decades:

·         India’s average unemployment rate remains around 8% while core CPI is 3.4% in 2024 and real GDP growth may come to around 5.0% for FY25

·         Indian economy may be in now stagflation scenario amid slowing economic growth, rising unemployment, and elevated inflation.

·         India’s GDP growth is too dependent on government consumption (spending + CAPEX) rather than private consumption, especially private CAPEX is weak due to higher borrowing costs and other structural reasons, forcing the government to make up through higher CAPEX; otherwise GDP growth may be affected, which was one of the primary reasons behind terrible GDP figure for Q2FY25.

In Q2FY25, India’s real GDP growth was subdued for various structural as well as exceptional reasons:

·         No price stability despite RBI keeping rates at significantly higher/restrictive rates for almost the last two years; RBI on hold since Mar’23

·         India’s total CPI is grown around 5% on average for the last two decades (at least); i.e. price is increasing by almost 50% every five years.

·         Although India’s core CPI (unofficial data) is hovering around 3.4% on average for 2024, it was also quite elevated around 5% if we consider 2015-23.

·         The recent softening of core CPI in 2024 may be also because discretionary consumer spending is softening, creating excess supply for such goods & services.

·         The higher cost of living for the middle class, especially surging food prices/inflation after the June’24 general election is affecting discretionary consumer spending

·         If we consider the essential cost of living like food, house (EMI/Rent), children's education, healthcare, transportation, and energy/electricity costs, a small middle-class family/household of 3-4 members needs at least $1200 or almost INR 100000 per month for a decent life/comfortable living; at present India’s middle-class average household income may be around INR 50000 per month; this is affecting discretionary consumer spending and overall economic activities.

·         RBI’s higher/restrictive borrowing costs for too long despite core CPI hovering much below 4% on a sustainable basis for the last few quarters is affecting India’s economic activities and GDP growth

·         India’s average unemployment (8%) and also under-employment (25%) and youth unemployment rate (45%) are very affecting discretionary consumer spending.

·         Private Capex remains subdued due to India’s higher borrowing costs not only in recent times but also for almost the last two decades except GFC times.

·         India’s economic activities and GDP growth are heavily dependent on government spending and capex; excessive deficit spending or fiscal stimulus is causing higher public deficit, rising public debt, and growing LCU (local currency unit-INR) devaluation, which is causing higher inflation along with elevated imported inflation.

·         India’s average wage growth is higher than labor productivity, especially in the government sector, which is again causing higher inflation.

·         Overall productivity growth of the Indian economy remains well below nominal and even real GDP growth overheating and in turn inflation.

·         India’s elevated total CPI inflation; especially food inflation is a result of the huge demand for almost 1.45B people (almost 18% of the global population) and inadequate supply chain, infra, and logistics coupled with occasional adverse weather.

·         Indian general public, politicians, and policymakers are too busy with active/drawing room politics rather than work/business, which is also affecting the economic activity of the country; while China is building its huge network of HSR (High-Speed Railways) rapidly within a few years if not months, India is still lagging for the same in the last 10-years

·         Indian politicians and policymakers are busier with policy marketing rather than policy-making.

·         Higher cost of doing business in India including political/admin rampant corruption and various regulations affecting not only domestic investments but also FDIs

·         Lack of sufficient investment in research & innovation along with skilled workers (unlike in China)

·         Higher energy costs and lack of big industrial infra like in China

·         Lack of modern-day labor & land reform/law

·         India’s high & very complex indirect taxes/GST on virtually all goods & services and also fuels are causing significantly higher costs of living and affecting discretionary consumer spending.

·         India’s SMEs are affected due to higher compliance costs of business, which is affecting the viability of the business itself.

·         Tech disruption/Change of business model advent of instant delivery of grocery/FMCG/Electronic goods like Swingy Instamart, Zomato etc are affecting foothills and business of big and small retailers like Reliance and also neighborhood Kirana shops; thus big retail businesses are now in stress affecting organized/formal/corporate employment for the retail sector, although there is also a surge of Swingy delivery boys earning around Rs.20K/month on an average.

·         The change in the business model for retail is also affecting consumer foothills in the shopping mall and further consumer discretionary spending.

·         Growing political & policy paralysis in India affects economic growth; politicians are not interested in vital economic data like unemployment/employment, core inflation, and retail sales like in the US or any AE; without proper economic data, no policymaker will be able to drive the economy properly.

India's current market scenario: Nifty

India’s benchmark stock index, Nifty corrected almost -11.5% since mid-Sep’24 from a life lifetime high of around 26277 to a low of 23263 mid-Nov’24 and is now trading around 23800; overall, Nifty gained only around 9% in 2024, underperforming DJ-30, which gained around 13% and S&P 500 around 23%.

Nifty was dragged by:

·         India’s slowing economic activities

·         Subdued corporate earnings & guidance and the concern of stretched bubble valuation

·         Lingering geopolitical tensions (Gaza/Iran and Ukraine war)

·         Ongoing Indian political circus, growing political uncertainty over Adani to Ambedkar issues, political & policy paralysis

·         Hawkish hold by RBI despite stagflation-like scenario

·         Negative global cues amid a hawkish cut by the Fed

·         Growing geopolitical tensions in neighboring Bangladesh affecting Indian trade and also various companies exposed there

Current market outlook: Nifty:

·         At around 23500 recent low of Nifty and TTM EPS 873, the TTM PE is around 27, still very expensive and above average PE 23

·         The market is now expecting Q3FY25 (Dec QTR) TTM EPS around 903 against an actual 877 for Q2FY25

·         For FY25 and FY26, the estimated Nifty EPS is around 930 (+8.75%) and 1069 (+15%)

·         At around 1069 projected EPS for FY26 and mean/average OE of 22, the fair valuation (FV) of  Nifty may be around 23500; i.e. present levels.

·         At around 1230 projected Nifty EPS for FY27 and 22 mean/average PE, the fair valuation of Nifty may be around 27000

Nifty EPS was dragged by in H1FY25:

·         Higher borrowing costs,

·         Higher banking NPA

·         Tepid discretionary consumer spending amid skyrocketing cost of living and elevated unemployment/under-employment

·         Higher input costs and

·         Subdued global trade amid lingering geopolitical tensions and fragmentations

·         Faulty & complex models of GST

·         High indirect taxations & tariffs,

·         High energy, and business establishment costs,

·         India is also losing its competitiveness in the goods export market despite the advantage of relatively cheaper labor costs and devalued currency.

Looking ahead, Nifty earnings (EPS) might be supported by:

·         RBI rate cuts/lower borrowing costs

·         Higher USDINR, positive for export-heavy Nifty earnings; almost 55% of Nifty earnings come from export-led by IT/tech, petrochemicals

·         Comparatively good relations between Trump-Modi/Indian corporates may also limit any impact of Trump trade war 2.0

·         Expected quickened ceasefire in Gaza and Ukraine war under Trump 2.0 may be also positive for the Indian market.

·         Although, rate cuts may be negative to some extent for bank earnings, lower borrowing costs may also ensure lower NPA provisions for household and business borrowers; thus bank earnings may also get a boost along with expected higher prices of bonds (HTM portfolio); almost 30% of Nifty earnings come from banks & financials led by top-notch/blue chip private and public sector big banks

·         India’s nominal GDP growth of around 10% on average should also support a 15% average growth in corporate earnings.

Conclusions:

India’s Nifty may have run too much ahead of its potential on Modi 3.0 optimism (since the June’24 election outcome) but is now falling back to reality as Modinomics eventually failed to boost corporate earnings meaningfully due to a lack of much-needed economic and policy reforms at the ground. In H1FY25, Nifty rallied almost 30% against the normal average run rate of 23% for the whole year.

Also, despite the huge flow of black money, India’s discretionary consumer spending is under stress due to the high cost of living, elevated unemployment, and under-employment. Faulty & complex models of GST, high indirect taxations & tariffs, high energy, and business establishment costs, and higher input costs are affecting corporate earnings. India is also losing its competitiveness in the goods export market despite the advantage of relatively cheaper labor costs and devalued currency.

Also, India needs to invest much more in innovation to improve the productive capacity of the economy to be a developed economy with improved GDP/Capita and inclusive growth. Indian stock market is now losing the so-called EM scarcity and Modi premium due to extreme political/electoral funding corruption by almost all major political parties in the country. This along with Rabin Hood's Politics & policies (24/7 Helicopter Money) is causing a higher public deficit, higher public debt, and higher currency devaluation. There is no price stability and the lower middle class is in trouble to meet the higher cost of living, especially in urban metro areas. This is affecting urban discretionary consumer spending and overall economic activity.

Nifty is poised to rebound in the coming days on hopes of a blockbuster budget and tax cuts, the fact is that only around 20M of Indian people are paying any amount of income taxes out of 350M potential middle-class consumers. Thus if 75% or even 100% of actual income taxpayers get some form of relief through some tax cuts, it may be grossly inadequate to address the present issue of weak private consumption (spending _ CAPEX) in India. Policymakers need to ensure price stability and vitalize India’s employment situation to boost private consumption and the vicious cycle of economic activities for inclusive growth. Also, there is an urgent need for GST reform along with income tax and tariffs to boost consumer discretionary spending.

India needs proper monthly data for the employment situation and core CPI; RBI should be given a US Fed-like dual mandate of maximum employment (say 95% of the labor force) and minimum price stability (like 3% core CPI). RBI or any central bank can't control food inflation by curtailing demand through higher borrowing costs as it may eventually lead people to starve; India's unemployment rate is around 8%, while the total CPI is 5% for the last 20 years. The Indian economy needs lower borrowing costs like 4% in China to encourage private CAPEX, boost consumer spending, and eventually quality employment. India also needs much higher agri/farm output to cope with increasing demand, not only for the 1.45B population but also for increasing stocking by big corporate offline/online retailers.

Also, India needs an affordable education and healthcare system in PPP mode along with a much more high-quality universal public healthcare and education system (like in any developed economy). At present, political parties are allowing the dominance of private healthcare and education mafia raj in the country by systematically destroying the free public system for vested interest (cutting money). All these are causing extremely high cost of living for middle-class families, affecting private consumption and corporate earnings.

In India, the Middle class is getting the middle finger, while politicians are bribing the poor/lower middle class through Dole money for votes and destroying the economy to stay in power and earn cut money. Indian politicians are destroying the economy by providing dole/helicopter money for votes of BPL/APL --this is causing higher inflation and INR devaluation; money supply is increasing without productivity in proportionate, which is causing higher inflation;  combined PDL was around  INR 246T against real GDP 174T and nominal GDP 295T in FY24 as all political corruption and cut money, Dole money and huge VVIP expenses are all adding into public debt, while the middle class is getting the middle finger as it does not provide funds or vote bank for political parties. If India’s politicians (across the party line) and policymakers do not change course in the coming days, then the country may soon become a banana republic rather than a developed economy. India has to improve its productivity, which is the ultimate, not mere GDP growth rhetoric.

Eventually, Nifty EPS growth will have to support at least fair valuation:

At around 23500 Nifty and 877 TTM EPS for Q2FY25, the current TTM Nifty PE is around 27, still far above even bullish valuation zone 25. The average fair PE is around 22-20 against average Nifty EPS growth of 12%. At around 930 projected Nifty EPS for FY25 and reasonable fair PE of 22, the projected fair (intrinsic) value should be around 20450; the FY24 Nifty EPS was 855 vs 780 for FY23 and 725 in FY22; growing around 9% on average, while longer-term average growth around 12%.

Assuming 15% growth for FY26, the projected Nifty EPS may be around 1069, and at 22 reasonable fair PE, the fair value may be around 23500; i.e. if Nifty consolidates around present levels of 23500 and again goes higher from 2025, we have to understand that Nifty will then began to discount the projected FY26 Nifty EPS, but still then will be susceptible for a healthy correction if quarterly report card continues to come subdued amid higher borrowing costs, higher banking NPA, tepid discretionary consumer spending, higher input costs and global trade and geopolitical tensions. Nifty EPS may not grow by the expected 15% even in FY26, if there is no major economic reform, especially in labor, land, and direct taxation.

Technical trading levels: Nifty/India 50 Future/CFD

Whatever may be the fundamental narrative, technically Nifty Future has to sustain over 24200 for any recovery to 24400-24600 and a further rebound to 24700/25050-25200/254450* and further rally to 25650/26000-26200/26500 and 26650*/26800-27000/27200* in the coming days; otherwise sustaining below 24150/24000-23800/23550, Nifty/India 50 may further fall to 23400/23250 and 23100/23000-22850/22700 and 22450/22150-21250/21000 in the coming days.