It’s a ‘puzzle’ for me why stock market is buoyant while economy is sinking, If you can crack this puzzle for me, I would fly down here all the way from the US to understand it.
— Arvind Subramanian, Former Chief Economic Adviser
Calendar 2019 witnessed one of the most hated rallies, with only a few pockets of the market creating wealth while a large spectrum of stocks still languishing mainly due to the somber economic scenario captured in the lowest GDP growth in last six years. But such times have occurred in the past in 2015–16 when the indices had fallen over 20% even when the economy grew nearly 8%. The logical conclusion of this divergence is the hopeful nature of investors, who are investing when the economy is at the bottom, so they can smartly reap the benefits when times change.
Considering the current market rally, the most likely scenario seems to be a turn in the economy a few quarters down the line, which will justify high valuations later.
So, In layman terms, How to track India’s economic health?
Let’s make it simple, Here are 16 high-frequency indicators to track India’s economic health (with explanation)
1) Passenger vehicle sales (domestic) (YoY %) : -13.08% (Dec 2019)
What does it indicate? — This indicator reflects the (YoY %) growth in the domestic sales of passenger cars and vans. Data for the preceding month is released in the second week of every month.
How much it should be? — The auto industry contributes 7.5% of India’s GDP and a whopping 49% of manufacturing GDP with a large economic multiplier impact. So, the higher the growth better the GDP.
2) Tractor sales (domestic) (YoY %) : 2.42 % (December 2019)
What does it indicate? — This indicator simply reflects the (YoY %) growth in the domestic sales of tractors. Data for the preceding month is released in the second week of every month.
How much it should be? — The agriculture sector in India has traditionally been one of the largest employment generators employing almost 45% of the population and contributing to almost 15% of the GDP; a situation unlike most developed and emerging economies where these numbers are around 3%-5% and 1% to 3% (GDP contribution) respectively. So, again higher the growth better the GDP.
3) Broadband subscriber base (YoY %): 29.18% (November 2019)
What does it indicate? — This indicator reflects the (YoY %) growth in the internet subscriber base.
How much it should be? — Higher-income countries with10% increase in broadband penetration yields 1.4% increase in GDP growth. While Middle-income countries: 10% increase in broadband penetration yields 0.5 % increase in GDP growth. India is a low middle–income country.
4) Domestic air passengers (YoY %): 11.23% (November 2019)
What does it indicate? — This indicator reflects the (YoY %) growth in the total number of passengers flying domestic scheduled airlines.
How much it should be? — Reaching double digits for the first time since January 2019, domestic passenger traffic growth in India jumped to 11.23% in November as compared to the corresponding month of 2018 indicates the trend continues to remain the same. As Crude price is unpredictable so airlines try to increase the rush for smooth functioning, unlike Jet crackdown.
5) PMI composite: 53.70%(December 2019)
What does it indicate? — The India composite output index is a weighted average of the Manufacturing Output Index and the Services Business Activity Index.
How much it should be? — Index values above 50 indicate expansion in private sector activity, while index values below 50 indicate contraction. The data for the previous month is released on the third working day of the ongoing month.
6) Core (8-infrastructure sectors) growth (YoY %) : -1.53% (October 2019)
What does it indicate? — This indicator reflects the (YoY %) growth in the index of eight core infrastructure industries. The eight industries are — Electricity , steel, refinery products, crude oil, coal, cement, natural gas and fertilizers. The index for the previous month is released on the last working day of every month. The Eight Core Industries comprise 40.27% of the weight of items included in the Index of Industrial Production (IIP).
How much it should be? — Of course, the growth of eight industries will result in a better GDP. any doubt?
7) Bank’s non-food credit (YoY %) : 7.18% (November 2019)
What is it? — The bank credit is categorized into food credit and non-food credit. The food credit indicates the lending made by banks to the Food Corporation of India (FCI) mainly for procuring foodgrains. It is a small share of the total bank credit. The major portion of the bank credit is the non-food credit which comprises of credit to various sectors of the economy (Agriculture, Industry, and Services) and also in the form of personal loans.
The data on bank credit is collected on a monthly basis by the Reserve Bank of India (RBI). The data is sourced from 46 commercial banks, accounting for about 95% of the total non-food credit deployed by all scheduled commercial banks (SCBs).
This indicator reflects the (%YoY) growth in the outstanding amount of credit to businesses each month and is released on the last working day of every month. Credit growth is good for the economy while controlling NPAs.
8) Rail freight traffic (YoY %) : 4.27% (December 2019)
What does it indicate? — This indicator reflects the (%YoY) growth in the freight traffic of major commodities (measured in ‘000 tonnes). The data for the previous month is released in the second week of every month.
How much it should be? — Freight traffic is the major source of revenue for Indian Railways. Only one-third of the 13000 trains running daily on IR are freight trains, but it accounts for 65% of the total revenue of IR. Railway Freight traffic is vital for the economic and industrial progress of the country.
9) Import cover (FX reserves in months) : 11.48% (December 2019)
What does it indicate? — This indicator measures the number of months of imports that can be covered with foreign exchange reserves available with the central bank of the country.
Importance: The importance of building up and being able to sustain a higher import cover had been recognized by India’s policymakers even prior to the 1991 crisis. India had foreign exchange reserves which meant to cover import costs for two years. But, that was just sufficient to cover close to two and a half months of imports only, because of the crisis. India’s Foreign exchange reserve went up from $ 2.2 billion in 1990–1991 to $20.8 billion in 1994–95. During the currency crisis of 2013, when foreign exchange reserves fell to about $275 billion, import cover declined to about seven months. Presently, the country’s foreign exchange reserves, which crossed $360 billion, could cover imports for 10.9 months
Eight to ten months of import cover is essential for the stability of a currency.
10) Rupee vs Dollar (% MoM) : 0.42% (December 2019)
What does it indicate? — This indicator reflects the month-on-month change in the average daily USD-INR exchange rate.
How much it should be? — Although the weaker currency boosts the exports but stronger currency is preferable in many aspects.
11) Labour-intensive exports (YoY %) : -3.65% (December 2019)
What does it indicate? — This indicator reflects the year-on-year growth in exports of labor-intensive sectors including tobacco, leather & leather manufactures, gems & jewellery, man-made yarn/fabs/made-ups etc, ready made garments of textiles, jute manufacturing, carpets and handicrafts (exc handmade carpet)
How much it should be? — Better export is always good for the economy.
12) Trade balance (as % of total trade) : -17.06% (December 2019)
What does it indicate? — This indicator reflects India’s trade balance as a percentage of India’s total trade. The data on India’s merchandise exports and imports for the previous month is released in the third week of every month.
A trade surplus (who only existed in India’s dream) can create employment and economic growth, but may also lead to higher prices and interest rates within an economy. A country’s trade balance can also influence the value of its currency in the global markets, as it allows a country to have control of the majority of its currency through trade.
13) CPI (YoY %) : 7.35% (December 2019)
What does it indicate? — This indicator reflects India’s retail inflation based on the Consumer Price Index (CPI). The data for the previous month is released on the 12th of every month (or the next working day, if that day is a holiday).
Higher inflation leads to derail the economy.
14) Core CPI (YoY %) : 3.75% (December 2019)
What does it indicate? — This indicator reflects India’s CPI inflation excluding volatile components such as food & beverages; pan, tobacco and alcohol; LPG, kerosene, and other fuels within fuel and light sub-component; and petrol and diesel within transportation and communication category under the miscellaneous sub-component of CPI index. It carries a weight of 47.4% in the CPI basket.
15) Real rural wage growth (YoY %) : -1.21% ( October 2019)
What does it indicate? — This indicator reflects the (YoY %) growth in real wages. Real wages are computed as nominal rural wages deflated using the CPI rural index.
Rural wage growth for men for both agricultural and non-agricultural occupations was lower than consumer price inflation for rural India which means the real rural wage growth, or wage growth after taking inflation into account, was negative. In other words, real rural wages, far from seeing any growth, contracting. The accompanying chart shows that this is not an isolated instance, but has instead been happening every month since July 2019.
Rural workers’ real wage rate growth was very high in 2014, but has fallen dramatically since then which is not good for rural India.
16) Job Outlook (net response %) : -0.90% (September 2019)
What does it indicate? — This indicator reflects the ‘net response’ rate in the Reserve Bank of India’s quarterly industrial outlook surveys to the question of job outlook, and measures the difference between optimistic and pessimistic respondents in each round of the survey.
How much it should be? — The range of values goes from -100 to 100, with higher values indicating greater optimism on jobs.
Growth slowdown in India temporary, expect momentum to improve going ahead: IMF chief
India’s economic slowdown is showing some signs of bottoming out, with six of the sixteen high-frequency indicators in green (above the five-year average trend) as of December and Investors are still optimistic on market outlook.
350–400 midcaps, smallcaps to double prices in 2020: Porinju Veliyath
As an investor, you should hike exposure to the mid-cap segment, start using portfolio tracker, Avoid knee-jerk reactions, stick to asset allocation, Get out of schemes and fund houses with dubious holdings, Put some money in safe heavens, Resist the temptation to invest in property for short term and increase the size of your emergency corpus to 8–12 months’ expenses.