India stocks boom amid global gloom?

An anomalous situation exists today. Experts admit that Indian stock markets are defying gravity in the midst of a near crisis-like global economic and jobs situation due to the disruptions in global supply chains created by Xi Jinping’s ‘zero Covid’ policy in China, the ongoing Russia-Ukraine war, and the universal need to counter climate change.

Illustratively, the UK/EU are reporting recessionary trends. While the US economy is still buoyant (despite earlier contrary forecasts), the latter half of 2022 has been dominated by news of large layoffs in US tech companies, including at Facebook, Amazon and Google. Over one lakh layoffs have already occurred. It was earlier felt that concerns about this need to be tempered, as the cutbacks in this sector may not reflect in the overall numbers given that other segments were growing well. The US had added 315,000 jobs in September and 261,000 in October, and its unemployment rate was 3.7 per cent in October, against 14.8 per cent in April 2020.

However, on November 27, Mississippi-based United Furniture Industries, one of the largest furniture makers in America, laid off 2,500 workers and truck drivers, almost its entire workforce, by a series of SMS/Email messages without any discussion regarding layoff compensation. Sudden failures of such low to medium-tech companies are rare in a buoyant economy. Several things could be going amiss on account of the stringent actions adopted by the US Federal Reserve to check inflation.

Back home, Indian exports suddenly contracted in October for the first time since February 2020 by 16.5 per cent -- a very sharp reversal of the earlier growth trend. Alongside, imports growth has also slowed down for the first time in 21 months. Such sharp reversals are rare. It last happened during 2014-15, when global trade collapsed in the face of a commodity price crash and helped intensify the then-ongoing NPA crisis.

Our dependence on trade is now considerable. India’s trade-to-GDP ratio for 2021 was 43.68 per cent, a 5.87 per cent rise from the 2020 level of 37.81 per cent. Elsewhere, EU and UK report ratios in the mid-50s and accordingly their stock markets are sensitive to global events. The ratios of the US and China are much lower (US trade-to-GDP ratio for 2020 was 23.44 per cent while China’s was 37.43 per cent in 2021) and though they can afford to ignore global cues, Chinese markets are down and US markets relatively subdued.

In contrast, our stock markets are not only unaffected but remain buoyant, in contrast to global markets being either subdued or in active retreat. A possible reason for this could be the innovative Systematic Investment Plans, first introduced in India by Franklin Templeton soon after economic liberalisation. These are nowadays heavily promoted by celebrated influencers. About 60 million SIP accounts garner over Rs 13,000 crore every month.

Recall what the then head of Citibank, Chuck Prince, said in defence of banks’ behaviour in the face of the global financial crisis in 2007-8: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you have to get up and dance”. In India, our money supply is growing at over 18 per cent, much faster than our GDP growth at 7 per cent. Alongside are the global inflows. World Bank estimates that India could receive a record $100 billion in 2022 as inward remittances from our NRI migrant workers.

In addition, are the FII/FPI inflows attracted by increasingly liberal inward investment rules. Individual investment opportunities are limited as banks pay low interest and private sector capital formation is still not happening in equi-sized amounts. We also have stringent exchange control rules. India still prevents domestic citizens from keeping foreign currency savings in local bank branches. Most, if not all, of our peers, do not have such restrictions. This policy framework of encouraging inflows and penalising outflows creates a ‘pressure cooker’ type of monetary environment.

The combination of increasing export dependency, increasingly gloomier global cues and a heavy inflow into our stock markets could, in combination, create conditions where accidents are waiting to happen. While individuals could consider partial profit-booking to de-risk portfolios, we also need policy measures -- some systemic type of safeguards.

A simple regulatory safety valve could be to allow our principal banks to offer local foreign currency savings and fixed deposits to their customers within pre-defined limits. Some savings may get diverted, thereby reducing pressure on our stock markets. It will also incidentally reduce our banking dependence on foreign currency borrowings and enable our banks to stand taller in global marketplaces.