Alarm bells: Bearish markets swallow Modi regime's high growth claims
Within the span of a few hours Thursday, investors in India lost 3.13 lakh crores as the BSE Sensex fell 807.07 points. The 30-share Sensex ended the day at 22,951.83, or 3.40% down. It was the steepest single-day fall in the last six months.
What made the carnage particularly shocking was that only two days ago, the government presented a rosy picture of the economy, projecting an estimated growth of 7.6% for the current fiscal.
Though economists disputed the credibility of the data, the government's Chief Statistician, TCA Anant Kumar, dismissed their criticism as a lack of understanding of the new GDP series.
The critics had especially raised doubts over the growth in Manufacturing (9.5%) and Financial Real Estate & Professional Services (10.3%) sectors.
A look at the stocks that crashed the most on 11 February shows that the investors agreed with the critics. They, too, did not trust the government's data and instead relied on company results to assess the state of the Indian economy.
As many as 28 of the 30 bellwether stocks of the S&P BSE Sensex ended up in the red, with manufacturing and financial services companies taking a severe beating.
The top losers in the manufacturing sector were:
- BHEL 6.01
- Tata Motors 5.55
- M&M 4.93
- Tata Steel 4.52
- Maruti 3.85
- HUL 3.14
Top losers of the BSE Banking Index were:
- Kotak Bank 5.73
- Punjab National Bank 4%
- Axis Bank 3.99
- ICICI Bank 3.77
- HDFC Bank 3.73
- Federal Bank 3.31
- State Bank of India 2.99
The panic in the market started when the State Bank of India, the country's largest bank, reported a 61.67% fall in profits in the quarter ending December 2015 and an increase of 40.8% in Non Performing Assets, or bad loans.
BSE Sensex's biggest manufacturing sector losers - BHEL (6.01%), Tata Motors (5.55%), M&M (4.93%)
The condition of public sector banks has been a cause of concern for the Indian economy as they account for 70% of the market share. Reserve Bank of India Governor Raghuram Rajan has tightened the norms, forcing PSU banks to declare a lot of their assets as bad loans, a large amount of which may have to be written off.
This means there might not be enough liquidity for businesses in the coming quarters to be able to support the growth the government has been projecting.
Worse to come?
Stock market analysts are aware of this situation. They are calling the fall in the stock market a correction that reflects the current position of profitability in the economy.
"When corporate sector earnings don't grow quarter after quarter this is what happens to stock markets. Indian companies have reported poor earnings for the last six quarters now and I don't see this improving in the coming quarter either," says Saurabh Mukherjea, CEO, Institutional Equities, Ambit Capital.
"The Indian markets, including the Nifty and the BSE, have reached where they were two year ago, and this reflects the situation of the Indian corporate sector."
While the government has been trying to sell India's growth story to investors by citing an increase in FDI and projecting higher GDP growth estimates, the macro numbers have constantly put a question mark over its claims.
The BSE touched the 30,000 mark in March 2015, within nine months of the Modi government coming to power. But it has been touching new lows every quarter since.
The government has tried to defend its performance by citing increased indirect taxes and higher FDI. But many economists aren't impressed.
Ajay Chibber, a visiting professor at the National Institute of Public Finance and Policy, says, "While it's good that there FDI has increased since the new government came to power, even those claims need to be examined. A major part of FDI is in the form of 'intent' to invest and cannot be counted as on ground investment. So until that investment comes on ground, we can't say much about it".
When corporate earnings don't grow, this is what happens to stock markets: S Mukherjea, Ambit Capital
Barring services, most other sectors of the economy have performed badly since the Modi government took over. India's exports have declined for 13 months on the trot, cement and steel companies have as much as 30% of their capacity sitting idle. All this is taking a toll on the investors' confidence.
Jayant Manglik, President, Retail Distribution, Religare Securities says, "We are not completely surprised with Thursday's fall in Nifty but our anticipation was that it would be gradual. We were expecting Nifty to take a pause around 7,100 level first but it breached that mark in no time and penetrated 7,000 as well. All this shows the level of pessimism among investors. The fall isn't yet over."
The bear is on the prowl. The government better be wary.
Edited by Mehraj D. Lone
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