The disconnect between the stock markets and the Indian economy

Let’s say a friend of yours, has INR 50,000 and wants to own a business, hoping to make a lot of money over a period. He observed that with COVID 19, many companies offered work from home to their employees and therefore the need for laptops has increased. Now here, for someone to start a new company in this industry, they need government permissions, plant, property and equipment, raw materials, and hundreds of other resources. Not to mention, their investment of INR 50,000 is not enough to fetch them anything. So, they choose to invest the same in some other company which has already secured all the expertise and resources to manufacture the same. Now, this is where the stock market comes into the picture where one can choose to buy partial ownership of any company from the ones listed there. Due to the rising cases of COVID 19 cases, the whole world shifted to online platform to carry on with their work and thus, the demand of better computers and laptops increased. Manufacturing companies boosted their productions to meet the demand and earn profits from this opportunity. They employed more laborers, bought more raw materials, and invested in their research facilities to improve their process and increase their supply. In very simple terms, this is how the economy grows, as with increasing demand, the supply also started increasing. Businesses start making more profits and as a result, they invest more and hire more employees to expand. As employment increases, the buying capacity also improves. With more money in hand, consumers spend more to buy different comodities which creates more demand and this cycle goes on. This demand is capitalized by businesses and now their stock prices also rise.

So, here we might start thinking that, there is some relationship between the economy and the stock market. But whatever we understood till now, is just a partial truth or only the half picture. The rise and fall of stock markets is not just dependent on the economic position of the country. There are hundreds of other factors as well which play a very important role in it. Government policies, political scenarios, market sentiments, which unlike other factors, are purely emotional, etc are few major contributors to fluctuations of stock markets. Markets in the short term, are irrational and only in long term they are efficient and reflect true economic progress as measured by GDP growth over long periods. Try holding this thought for a while, as by the time we conclude this, everything will automatically start making more sense.

To understand the previous idea in a better way, let’s observe the performance of the Indian stock market from the beginning of 2020. Here we have a graph showing the NIFTY50 market index figures from January 2020.

Exhibit published on, October 31, 2020.

With the first case of COVID-19 in India, reported on 30th January 2020, the stock markets began to fall. As the country went into lockdown, the economic activities also reduced to a bare minimum. The GDP growth of the country contracted by 23.9% by the end of the first quarter. Around 41 lakh job losses were marked which increased the unemployment level to 27.1% by the end of April 2020. Both the stock market and the country’s economy took a hit and witnessed a steep fall.

But the stock market started to recover soon, as few companies emerged as Corona warriors for them. Starting with Reliance Industries Limited, the Adani Groups, Sun Pharma, Bharti Airtel, Vedanta Ltd., the Shiv Nadar Group, the Aditya Birla Groups, and the Radhakishan Damani Groups, clocked substantial market gains. Each company had a different reason for the sharp rise in their share prices. A few of the contributing factors were aggressive and successful fund-raising programs, the rally in pharmaceutical sectors amid the COVID pandemic, increase in data usage with the work from home policies of the companies, increase in the demand for health care products, increase in the usage of logistic services, etc.

At this point, the markets showed positive signs of recovery and started rising but the economic growth was still suffering. The GDP growth reported in the first quarter was 5% and in the second quarter it further slowed down to 4.5%. The MSME sector which contributed to more than 30% of the total GDP was still under great stress. Moreover, the India-China standoff situations at the borders added to its loss. The government banned imports from China and motivated the citizens to boycott all Chinese products. Mr. Nitin Gadkari Minister of Shipping and the Minister of Micro, Small and Medium Enterprises raised his concerns regarding the losses that the local businessmen who had already paid for the goods and raw materials, will have to bear. Not to mention the increase in the cost of production as we imported cheaper machinery, electrical, chemicals, and other raw materials from China, also impacted the supply and demand of many products thus impacting the economy.

Since all the international trade declined, therefore it became very difficult for the industries to maintain a low cost of goods sold. Also, all the capital-intensive sectors such as construction sectors and manufacturing sectors were still unable to recover, due to the huge shortage of laborers to carry out the operations. An increase in the job losses decreased the spending capacity of the majority populations which led to a decline in the demand. The sudden change in the spending behaviour of the masses also led to a huge liquidity crisis for the industries making it more challenging for them to continue their daily operations. Our banking sector is still trying to recover from the huge NPAs accumulated over the period.

So with all things said, it is very clear that contrary to popular belief, the economy and the stock market are two different things. Markets, many times, ignore the economic reality and works in their ways, which are not in sync with the economic principles, we know. Since the Great depression of 1929, stock markets have repeatedly shown that it has no link with economies or with business fundamentals. In one of the most famous books, ’The General Theory of Employment, Interest, and Money’, by economist John Maynard Keynes, the author talks about markets being governed by wild forces, whereas the economic growth being derived from the real productivity of the country. Probably this is the only way we can understand, how Nifty50 closed the calendar year 2019 with gains of about 12.0% whereas our GDP only grew by 5.024%.

– Shobhit Jain, Editor, TAPMI Journal of Economics and Finance

TJEF Volume 4 Issue 2

The current recession faced by global economy is considered to be more destructive than the Global Financial Crisis, 2007-with a baseline forecast of 5.2% sis, contraction in global GDP in 2020. With US elections around the corner, a weakening dollar, chaos around the UAE Israel deal, Fed’s new plans of lifting inflation, disruptions in the worldwide supply chain- the global scenario is sturdily uncertain and predicting the road ahead is getting even more challenging.

The current state has revealed the structural problems pre-existing in the structural Indian economy. Whilst the current scenario demands an increased focus on health infrastructure, India’s health care infrastructure, expenditure as a % of GDP is abysmally low. The economy is expected to grow at 1.5% to 2% for FY 21, as per IMF and World Bank estimates. In the tepid demand scenario, the inflation is skyrocketing at 6.9% in the month of July. India has also been only one of the few economies facing PMI shrinkage in July, compared to a month ago. age

The sectors, which have gained out of the new normal, constitute of technology, pharmaceuticals, agriculture and FMCG catering to essentials. Financial institutions will bear the longest grunt of the crisis, with shadow banking crisis only worsening. The current scenario reveals a rather weak correlation between the stock markets and the economy-with Nifty reaching the overbought zone during the crisis.

Hence, in the next volume of the issue, we tried to cover various facets of the banking sector, the dire state of corruption in India and the inefficiency of the stock markets. TJEF has always aimed at presenting well-curated content from a bunch of ing enthusiasts possessing the right acumen for our reader base.

I would like to take this opportunity to appreciate the efforts put in by all the students to write for the journal.

Keep reading and keep the curiosity flowing!

Please find the link to the PDF version of the journal

Anjali Agarwal, TJEF Editor

The Increasing Difference

Do you have any idea how much an average Indian farmer earns? Or what an average Indian earns? Okay let us divide the economy of India into major sectors- Agriculture, Industry and Services. If we divide our $3.2 trillion nominal GDP ($11.2 trillion by Purchasing Power Parity) in these segments we will find Agriculture contributes about 15%. It is okay – even agriculture contributes only 1% of US GDP. But in India this sector employs 50% of the adult workforce. Just to reiterate- half of the India’s families are dependent on agriculture but they have only 15% share in the country’s annual income.

1950 to the second decade of 21st Century – One Sector has always been failing

Now coming to the question, how much exactly an average farmer earns? It is approximately ₹100,000/annually per household. Considering an average family has 5 people it is ₹20,000 per person and it only converts to less than a couple thousand rupees per month per person.

Maybe a brief idea about the growth rate of different Indian sectors might help us understand the vulnerable state of this agriculture sector. The agriculture sector which employs nearly 50% of Indian population grew at less than 2% whereas the Services sector grew at about 10% to make the aggregate to grow at 6-7% for the last 2 decades.

So fundamentally we will have to understand when we say a nation is growing at a certain rate, how uniform is that growth, who all are contributing to the growth, who are the outliers and who are out of the race? The GDP per capita (Nominal or PPP) can yet not define the real central tendency being highly influenced by the outliers. The median income level can somewhat account for the overall development along with certain other parameters including Mass Literacy or Infant Mortality Rate (basic hospital infrastructure and ordinary citizen’s access to the same).

Talking about the outliers –the promoters of Nifty 50 and top companies in the countries. But isn’t it obvious that they should have majority wealth to say- they only provide majority of jobs in the country and serve as real assets to the country? Isn’t it same for almost all rich to poor countries? The simple answer is “Yes”. But there’s a very big ‘but’. Is this at all a healthy growth? In capitalism it is. I mean how can Mukesh Ambani help own approximately 50% of RIL from the very start and RIL is today valued at $200b not by him but by the people of the world. The same goes for Jeff Bezos or Bill Gates – it’s the people of the world who value the businesses at more than $1.5 trillion.

But if the top billionaires literally add hundreds of billions of dollars to their total wealth in this horrible performing year of 2020 as Bernie Sanders complain about, what exactly does this mean? We are moving towards more financial extremism. If in 2010 someone said the total wealth of top 10 billionaires is equivalent to the bottom half of world population wealth; in 2030 it can a single person! Or even another way of thinking it – if Amazon’s annual median pay ($29,000) is equivalent to its CEO’s 9 seconds worth of income by 2030 it could actually be a second or two!

                                Source: Fast Company

Ensuring uniformity of growth is no one’s responsibility and when you have the large tech giants as publicly listed companies wherein no in is stopping a poor person to buy into their portfolio, why is it even a concern? Why and how should the government interfere? No one literally stopped a poor farmer to invest in Reliance Industries IPO on BSE and grow at almost the same rate as Ambani. It is he – who chose to invest in this own farming business and obviously lost to the growth race to the billionaires.  In all fairness many of these self-made billionaires have created such a humongous wealth they themselves never could’ve imagined in making so!

But is there actually any way that can help to keep a balance? Maybe a wealth tax for inheritance? Of course, many of these billionaires do pledge to give away a part of their wealth in charity and involve in several philanthropic activities like Facebook founder and CEO Zuckerberg pledging to give away 99% of his wealth or Bill Gates over a period of his life (Bill and Melinda Gates foundation) has given away $100b+. In Indian context we have Wipro’s Azim Premji, the MP Birla foundation, Tatas, Ambanis and Adanis amongst many others. The biggest concern in this context is absorption of the wealth in the society and if that one-time transfer can be capitalized to make a full-time employment opportunity.

                                The Philanthropy that matters

The only thing in this context is connection. A big business in any country not only provides job opportunities for thousands but enable thousands of other businesses to thrive amongst others. Think about an IT corridor- OMR in Chennai. Is it only the IT employees that benefit? What about the hundreds of snacks shop, hundreds of PGs, the huge demand in the local transportation, poll tax by government – and the list goes on and on. To see closely it is only a few tech giants indirectly employing so many. But what if a group of people is repeatedly cut off from this growth trajectory through generations? This is very important for us to understand – even if I agree a very small snacks shop is a beneficiary of TCS (his small shop beside the office); not everyone is having the opportunity to make that small shop also. If anyway the small businesses can somehow connect with the giant conglomerates it’ll be a great thing – but somehow a very good proportion of people stay out of the race permanently and neither is there any opportunity to connect in foreseeable future.

There is nothing wrong in capitalism if that capitalism can influence and benefit a good proportion of people in a particular geography. If it cannot do so – it will account for growth in GDP figures but that’s not “development”. And that “Increasing Mismatch” can be fixed with sustainable development and not only growth – not to mention growth is a huge component in the developmental process!    

From Debjit Pal : Editor – TAPMI Journal of Economics and Finance

The Story of Indian Pharmaceutical Industry

During the 1970s, the Indian Pharmaceutical market was nowhere on the map. But is now one of the emerging world leaders. Infact, it is called “the Pharmacy of the World”. Generic drugs comprise the largest segment nearly 71%, over the counter and patented drugs account for the remaining 21 and 9%, respectively. The Indian Pharmaceutical industry brings in a revenue of 38 million USD annually, making it the third largest in the world by volume and the eleventh by value. There is a total of around 3000 pharma companies and 10500 manufacturing units that are currently operational in India. The transition has been gradual but not without its pitfalls. There have been several factors that have influenced the evolution of the Indian Pharma industry.

Since the advent of the first pharmaceutical company in the early 1900s in Calcutta, there have been four periods for evolution for the Indian Pharma sector.

  • The 1900s were still dominated by the foreign players, post 1970 era saw a few changes in patent acts, it focused more on process patents and did not cover the products. This led to many players in the market take the opportunity to reverse engineer the drugs without having to pay royalty to the patent holders. This period saw a 10-fold rise in number of pharma companies in the country. Accompanied by the exodus of foreign players, the domestic generic pharma industry had an increased market share in generic drugs.
  • The early 2000s, saw these companies expanding their capacity even globally. The export market received many Indian entrants. The pharma export growth gained momentum, with the liberalization of the Indian economy that opened gates for privatization and globalization.
  • 2005 however saw a minor upheaval in the sector due to a change in the patents act that abolished process patenting and started product patents. This forced the pharma companies to shift focus from generics to R&D for new drugs components or API and other Biopharmaceutical products.

 The key segments in the pharmaceutical business in 2019 were:

  • API
  • Formulation manufacturers
  • Biotechnology sector
  • Contract Research and Manufacturing Services.

Figure 2: The Indian pharma industry YoY sales growth

The industry has seen a steep decline from 2007 due to increasing market volatility and even though there have been good phases, the growth still continues to remain volatile even to this day.

There are several reasons that contribute to the market volatility.

  • Emerging competition in the generic drug market from other countries have caused a substantial price erosion for generics and thus have caused significant drops in the pharma revenue.
  • Strict regulatory guidelines for manufacturing, quality control measures. There has been a substantial growth in the number of warning letters that the USFDA has given out to companies in the past few years.
  • The 2017 GST regime caused higher production costs and reduced profit margins.
  • Domestic price caps introduced by NPPA on drugs have caused these companies to reduce their production by considerable margins.
  • Increase in API costs have caused formulation prices to go up. India currently imports about 60% API from other countries for drug manufacturing and the increases prices have thus caused a steep decline in the profit margins.

But the industry has also started changing its outlook and have taken steps to combat the hurdles that lie ahead. Generic drug manufacturers are exiting non-profitable portfolios and looking for alternatives and new innovation strategies.

  • Focusing on differentiated complex generics because they are difficult to develop, face lesser competition and thus yield higher profit margins than normal generics. Regulatory bodies are also likely to prefer complex generics over old-school generics.
  • Specialty drugs are high on pharma launch agendas. They are high value drugs that aid in the treatment of chronic, complex of rare diseases. There is a 50% predicted growth in the market spend for specialty drugs.
  • One of the major focus areas in the current market are APIs. In-house API manufacturing is gaining momentum. Indian API exports have increased by 11% in 2019 and the global API market is predicted to reach USD 245 billion by 2024.
  • All the above shifts in the trends for pharma manufacturing has led to steep rise in R and D investments.

The companies are strategizing for long term value creation, focussing on effective cost optimization and building a robust culture of quality and excellence in regulatory compliance. These are key aspects to sustainable growth in the sector. All strategies are focussed on growth, which is a long-term goal. They aim at steady increase in the global footprint of the industry.

From Deyasmriti Nandi : Editor – TAPMI Journal of Economics and Finance

The Case for an IT Boom

I remember Jeffery Gundlach quoting Ernest Hemingway, ‘How did you go bankrupt? Two ways. Gradually, then suddenly’. This quote is deceivingly insightful. It shows how change takes place, small changes occur with the minimal impact until the cumulative effect reaches a critical point where the entire framework disintegrates and settles at a new equilibrium.

The quote seems apt for the world’s journey to its digital future, being accelerated by the pandemic. The groundwork for this new digital reality has been in progress ever since the mass production of computers and more so since the internet revolution. Being born in the early 90s in India, it’s truly astonishing to reflect upon how the digital world has slowly taken predominance in our lives from the time of the dial-up internet connection and computers being more of a novelty item to the smartphone-dependent world of today. The pandemic will now accelerate this trend even more with trends like work from home and e-commerce becoming the new normal, making parts of the old economy redundant. This has profound implications for sectoral returns in the coming decades, with few sectors disproportionately outperforming others.

The first IT boom in India happened in the late ’90s when the market realized the potential of Indian IT firms to capitalize on the world’s need to migrate business functions on to the computer. It has been 20 years since then and a lot has changed. The Indian IT industry has grown substantially. Just as an example, Infosys which had a revenue of less than Rs.2000cr in FY 2000 had Rs90,000cr revenue in FY 2020. Contrast this with HUL, a current market darling, which had revenue around Rs 11000cr in FY2000 and Rs.40000cr in FY 2020 barely keeping up with inflation. Both companies command similar markets caps around Rs 4.5 lakh crore, but Infosys trades 25x trailing earnings compared to HUL’s 65x.

The Indian IT sector despite its mighty financial performance through the last decades has not been a darling of the markets as it could not for obvious reasons sustain the growth rates during the early stages of the industry. Barring brief periods of outperformance as a defensive sector, it has barely been in the limelight. I remember around 3-4 years back when NASSCOM projected a 7% handle for industry revenue growth, investors were all ready to write off the industry as having limited growth potential. This dismal outlook for growth is precisely the reason for the underwhelming valuations for the IT industry compared to other sectors. The pandemic has broken this narrative and the market is slowly recognizing the fact the Indian IT industry barely into its 4th decade has plenty of gas left in the tank.

I enumerate the factors that I believe will lead to a massive re-rating for the Indian IT industry in the post COVID world

  1. The Indian IT industry at under $200 billion still is just a fraction of the near $3trillion global industry. There is tremendous scope for increasing market share with all factors that aided the industry’s growth thus far remaining intact.
  2. The pandemic has given a boost to the industry with enterprises worldwide being forced to strengthen their IT architecture and capabilities and this will be a persistent trend.
  3. The domestic market will grow to outpace Indian GDP growth and will be a significant contributor to revenue growth in the next decade.
  4. The market will realize the staunch nature of the earnings strength of quality IT firms. Customers find it difficult to switch vendors as the cost of migration outweighs any potential savings of lower pricing, hence protecting revenue and margins.
  5. There is no reason to believe that the total earnings of an Infosys for the next 30 years will be any less than HUL for the next 30 years and hence they should have similar valuations. The market will soon realize this fact and reprice accordingly.
  6. The level of Global debt means that the system cannot support ‘normal’ interest rates and global central bankers are sure to embrace dovish policy for the foreseeable future giving a great tailwind for stock valuation.
  7. The sector should be an outperformer just by the process of elimination with most other sectors still reeling from the impact of the pandemic and the road to recovery remaining murky for most. Some industries like Aviation and Hotels may not fully recover any time soon, as even after the pandemic ends, the behavioural change will ensure business travel is significantly scaled back denting a significant blow to revenues.
  8. Most Fund houses have been underweight the sector and thus once the sectors start outperforming, they will be forced to chase the sector to avoid underperforming the benchmarks. This fund rotation will be a great driver for outperformance
  9. More often than not, markets tend to have excesses at the later stages of secular trends and this will give outsized returns for anyone able to exit the trend in a timely fashion.

The above-detailed points and few others not mentioned will lead to a boom in the Indian IT stocks given stagnant or rising markets according to my judgment. The risk/reward for the sector seems very attractive as very little of the above narrative has been priced in. Even if the narrative fails, there will be a minimal loss since the present prices have not discounted for it. Let us wait for time to give the final verdict.

Written By – Nitin Mathew (BKFS, PGP 2)

What a nationwide ban on Chinese products could mean for India

The border clash between Indian army and the Chinese PLA has sparked an anti-China sentiment in the country.  Calls to boycott Chinese goods and reduce import from China have been voiced out by political elites and nationalists in India.

A brief synopsis of India China trade

India, initially a non-aligned country to world trade during cold war era, enjoys the status of most favoured nation with most countries around the world. India presently trades with around 140 countries, with China being the biggest trading partner after US.

 (India- China trade volume)

The bilateral trade between India and China have grown fourfold in the past decade. The trade volume between the two nations stands at 730,550 Crore INR, more favourable for China than India as India has a trade deficit of 371,018 crores INR with China.

 Chinese products hold more than 60% market share in India’s smart phone, solar power and pharma market.

The following are the potential impacts of banning Chinese products or raising tariffs against Chinese imports

Solar Panels and Photovoltaic cells:

India imports solar panels and solar photovoltaic cells worth $1.5 billion from China. The prices of the equipment are believed to be much cheaper than those produced by domestic manufacturers.

 A ban on solar imports or increase in tariff duties shall negatively impact solar productions and subsequently affect India’s committed renewable energy targets under Paris climate accord and International solar alliance.


India imports more than 60% of critical active pharmaceutical ingredients and key starting materials from China and 30% from countries like Germany, Sweden and Italy.

The prices offered by its Chinese counterpart are 25-30% cheaper than the prices offered by other countries. Moreover, the user companies of these APIs have invested deeply in building supply chains that traces back to China.

A ban on API and KCM imports impacts cost and competitiveness of user companies in the external markets especially Africa and South America i.e. the domestic API market is underdeveloped accounting for around 8-10% and API procurements from other countries are charged at cost plus premium which shall cost India with 0.89% of GDP annually.

Funding of Indian Start-ups:

(Chinese investments in Indian start-ups amounting to $4.6 Billion)

 Chinese investments in Indian start-ups have grown fourfold and presently stands at $4.6 Billion. Any adverse policy change by India like ban on products or increase in tariff shall affect India’s foreign policy credibility at a time when India has been trying to attract foreign investments. It shall also cause investors to liquidate their investments in India or realign their risk return perceptions and demand higher returns for the increased risk.

Consumers and Retailers:

A ban on Chinese products or increase in tariffs shall affect price sensitive consumers. The switching costs that a consumer shall incur in purchasing imported products of other countries are much higher. Moreover, since the Chinese products in India are already paid for, banning them shall affect the poorest retailers, because of their limited ability to absorb unexpected losses.

Approach to progressively reduce interdependence on Chinese products –

Government scheme’s and subsidies should be aligned towards creation of product alternatives which can compete both in terms of quality and cost against Chinese products. For example, Despite the existence of incentive schemes and subsidies to boost domestic production of solar panels and solar cells, the domestic products are not at par with Chinese products in terms of efficiency and durability

(India’s R&D expenditure as a % of GDP)

The Government should increase its resource allocation for R&D expenditure and encourage private investments in R&D via subsidies and concessions so as to revitalise the innovation ecosystem in India. Currently the government’s expenditure on R&D (as a % of GDP) is 0.86. An increase in R&D expenditure shall equip the industries with technology and skill to maintain their competitiveness in the market.

Liberalization of foreign direct investment norms are required to facilitate the domestic industries to move towards better productivity and efficiency as presently India receives only 25% of the FDI that China gets and 10% of what US receives.

The way forward

India adopting a protectionist policy at a time when it is facing a sharp GDP decline, could be more detrimental to India than China and turning a border dispute into a trade war is unlikely to solve the border dispute. The employment of traditional channels like dialogue and consultation are the need of hour to solve differences at the highest levels. Thus, a strong India-China relationship is important not only for the mutual benefit of its people, but also for the world.

Written By – R Mrithyunjay