Is the party over for the world’s fastest-growing economy?

Everyone has a plan till they get punched in the face. The Indian economy has just experienced that brute force. Till a month ago, it was all about the festive season and how great things were; premium cars, confectionery and clothes were flying off the shelves.Boom! Kapow! Now it is all about “where has the growth gone?”It’s difficult to establish causality behind the slowdown but here are some plausible reasons.High interest ratesHigh taxesHigh household debtUrban consumers are being squeezed by high interest rates and inflation, and small-ticket borrowers are being unable to service their loans on time. Recent regulatory actions of higher risk weights on unsecured personal loans have also squeezed the fund flow to consumers. Real salary and wage expenditure growth of listed non-financial corporates have moderated to 0.8% on year in the September quarter, from 1.2% in June — indicating shrinking purchasing power.The effects are now visible across sectors. Nestlé India CEO Suresh Narayanan says that premium consumption remains strong, but the middle segment is shrinking. Nestlé India has experienced a 1.4% revenue growth in its Q2 FY25 results — the slowest growth in eight quarters. Auto inventories in India are at a high of more than 7 lakh units. Sales of SUVs — the fastest moving segment in auto — are also slowing down.A Bernstein India strategy report says that the market hasn’t yet fully priced in the extent of the slowdown that could be on the cards. Around 48% of the Nifty 100 companies have missed their estimates — which is the highest since March 2020 — the stock market was on a high but is only now beginning to realise that the party may be over.The Nifty 50 is trading at a PE (price to earnings) multiple of 23x, which many investors feel is moderate, but some broking firms are calling out for a correction. Currently, the Nifty is trading at 23,953. Bernstein is putting a Nifty 50 target of 23,500 or a fall of 2% by the end of the year.But the Nifty 50 is down 10% from its high. This itself gives us some reasons to really understand what is happening with the overall economy. Besides the cities, much of India is facing the after-effects of high inflation and low wage growth.All this is being reflected in the Nifty 50, which is on a slow decline. There is now a high chance that the benchmark index will give single-digit returns for the coming year. If investors are going to look at the 30% annual returns of the past, they are in for some serious disappointment. medium nocaptionhttps://youtu.be/JZgyLVYkTw4?si=bj0uwy3Ws57Gwa1dThe market signal and trend changeAmerican investor Paul Tudor Jones once said that “nothing good happens below the 200-day moving average (DMA)”. Above the 200-DMA, a stock or index is considered to be in a long-term uptrend, and below it the downtrend starts.At the end of 2023, all stocks in the Nifty 50 universe — representing the crème de la crème of the Indian stock market — were trading above the 200-DMA. This indicated a healthy bull market. But as on November 4, a total of 19 out of 50 stocks are now under the 200-DMA and another five are on the verge of falling below it. These include market heavyweights such as Reliance Industries, TCS and Hindustan Unilever.Among the Nifty 50 stocks, the fall from an all-time high has been the most severe in the case of IndusInd Bank (-37%), followed by Tata Motors (-30%), Bajaj Auto (-25%), Hero MotoCorp (-23%) and ONGC (-23%).Among the six Tata group companies that are part of the Nifty 50, only Trent is trading above the 200-DMA, but it’s also down 15% from its all-time high. The other five — Tata Steel, Tata Motors, TCS, Titan and Tata Consumer — are trading below the 200-DMA. None of the Nifty 50 stocks are trading above the recent all-time highs. medium115043197The growth slowdown virus is slowly spreading across the world’s fastest-growing economy. No wonder that companies such as Bajaj Auto, Maruti Suzuki, Hindustan Unilever, Nestlé India, among others — not to forget the smaller banks and NBFCs — are feeling the blues.India’s economic growth has slowed down notably from 8.2% in 2023-24 to 6.7% in Q1 of 2024-25. For Q2 FY25, the Reserve Bank of India (RBI) has reduced the GDP growth target to 7% from the 7.2% estimated earlier.The RBI, which has so far refrained from cutting rates, has stuck to its 7.2% growth target for FY25, whereas investment bank Goldman Sachs has pegged it at as low as 6.5%.The finance ministry has categorically pointed out the slowdown in urban demand, even as it argued that several growth indicators show continuing momentum.Component of the slowdownCorporate sales growth is starting to peter out on the back of slowing urban consumption, while stress emerges in the micro-finance portfolio of several lenders. The tag of a fastest-growing economy could be masking these pain points. But the markets are forward looking, and the sharp fall in October — led by foreign institutional investors (FIIs) pulling out en masse from the Indian market — could be a pointer towards the challenges facing the economy.1. As per an ET Prime analysis of 63 out of the Nifty 100 companies, which have reported their financial results till October 31, the sales growth has slowed. The topline of these companies grew at 5% in Q2 FY25 year-on-year, down significantly from 6.49% in Q2 FY24.2. Sequentially, for Q2 FY25 over Q1 FY25, there has been a contraction of 1% in sales growth for this set of companies. In fact, the growth has happened in smaller companies. If we look at the sales growth of the top 10 companies, which account for 57% of the total sales, we noticed that sales are up only 1.78% for Q2 FY25 over the previous year. Over the June quarter, the number is down to -3.5%.3. Corporate profits are growing below expectations, with 34 of the Nifty 50 companies having declared flat earnings so far. Nifty earnings per share (EPS) have seen a 7% cut in the past six months, paring the yearly growth forecast to 5%, the worst since fiscal 2020. medium nocaptionhttps://youtu.be/OyF0KD93QK4?si=2pW0-efnswRHJb_jThe government viewContrary to rural demand, there has been evidence of a slowdown in urban demand as reflected in the performance of various indicators during H1 FY25.“Volume growth in urban FMCG sales has moderated from 10.1% in Q1 FY24 to 2.8% in Q1 FY25. As per Fada (Federation Of Automobile Dealers Associations), auto sales declined by 2.3% in H1 FY25, mainly due to the lower sales in Q2 FY25 compared to Q2 FY24 in urban areas,” the finance ministry said in a report on October 28.Going forward, “the ongoing festive season and improvement in consumer sentiments may boost urban consumer demand. However, early indications were not particularly promising”, the ministry said in its monthly economic report for September. The government expects India to grow around 6.5-7% in FY25 — quite lower than the RBI’s growth estimates.Industry facing twin demand deficitsNot only has the finance ministry flagged urban consumption slowdown, voices within the RBI’s Monetary Policy Committee (MPC) have expressed concerns.MPC member Nagesh Kumar explained the need for a 25 basis-point reduction in repo rate at the committee’s October 7-9 meeting. He argued, “Indian industry is clearly suffering from demand deficits in both domestic and external markets. Demand deficits may be the reason private investment has not picked up momentum despite the companies’ healthy balance sheets and all the reforms and incentives extended by the government.”Kumar pointed out evidence of weakening demand in the domestic economy and exports. In the minutes of the MPC meeting, he made some key points:1. India’s merchandise exports have shrunk by 9.3% in August due to subdued demand abroad. The April-August growth of merchandise exports has been just a marginal 1.1% only. medium nocaptionhttps://youtu.be/vtOzEcFj6rU?si=wErzI_cYSyOdH7oY2. The core sectors such as cement, iron & steel, and chemicals showing negative growth over the past two quarters despite a rather heavy infrastructure push by the government through unprecedented capital expenditure since 2023-24 is a matter of concern.3. The cost of finance for private companies has gone up steadily since March 2022 when the RBI started to raise the policy rates. According to the enterprise surveys, the demand conditions in manufacturing and the job landscape moderated across major sectors.4. The consumer confidence surveys suggest the general economic conditions have worsened compared to a year ago.5. Overall business sentiment has moderated in Q2 FY25. The PMI (purchasing managers’ index) for manufacturing eased somewhat in September, although it stayed in the expansionary zone. All these trends point to the weaknesses in demand in the domestic economy in general, and industry in particular.The final cutOver the past month, stocks of top companies such as Reliance, Hindustan Unilever, Nestlé India, Maruti Suzuki and Bajaj Auto have fallen in the range of 15-23%. This is a significant correction in the prices of large corporations. It will be a mistake to imagine it as a normal pullback and points towards two things: the slowdown may be taking root in the Indian economy, and the worst is yet to come.Nilesh Shah, managing director of Kotak AMC, told the Economic Times that the returns of the past three or five years are unlikely to be repeated over the next three and five years. The broad markets returned 21% over the past five years and small-caps have returned 30% annually. He still hopes there is a fair possibility that India will continue to deliver, and its peers will score self-goals.