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India’s growth story has headwinds

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India’s economy grew at a faster-than-expected pace in the March 2023 quarter. The surprising upside resulted in analysts revisiting growth estimates for the next financial year ending in March 2024. There was an all-around excitement about the vital data released by the government. However, a closer look at the numbers can help you understand the economic challenges in the coming months.

The stock market reaction to the strong growth showing was tepid. Benchmark indices traded flat, and there is little excitement in the frontline shares that make up a sizeable chunk of these benchmark indices. Pulls and pressures of relative valuations drive financial markets. Indian shares have shown underperformance compared to the US S&P 500 or Korea and Taiwan in 2023. That is despite India being the fastest-growing large economy.

The NSE Nifty forward price-earnings multiple is near the 10-year average. That shows benchmark valuations are not expensive at the moment. The chart below compares the historical price-earnings multiple and the Nifty value over the past 20 years. The Nifty earnings per share or EPS have caught up with the Nifty value, which is why there is this yawning gap between the Nifty value and the historical price-earnings multiple.


A strong showing primarily led to India’s growth in the services and manufacturing sectors. At the same time, exports also remained strong despite a weak global environment. The RBI annual report highlights a few concerns in the 2022-23 growth data. Private consumption has shown slower growth in the quarter to March 2023. You must know that about two-thirds of India’s growth is through consumption. The RBI annual report highlights an uneven recovery in the consumption space in the auto sector. The price-sensitive entry-level car segment growth was sluggish compared to passenger cars. There is a continued lag in the sale of two-wheelers that shows a subdued rural demand for goods. About 40% of the two-wheeler sales are driven by rural demand. You may want to combine this data with the modest recovery observed in the small and medium enterprises or the MSME segment. RBI observes that MSMEs contribute 29% of India’s GDP and employ 11 crore workers. Middle-class consumers in India are not ready yet to splurge. While the rich consume more, the middle class has yet to find comfort in spending. That could also be a function of uncertainty over income. 

The conservative approach of the middle class is reflected in India’s manufacturing output growth represented by the IIP index. It slowed to 1.1% in March 2023 from 5.8% in February 2023.

Against these challenges, you need to identify sectors that are doing well to enhance your returns. Hotels, hospitality, travel and tourism have shown strong growth. You need to know companies catering to the needs of the rich and the upper middle class in India that are happy to splurge.


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