Markets Are Just 2.5% Away from September Peak
The Indian markets, along with many others worldwide, have demonstrated astounding resilience
On Episode 619 of The Core Report, financial journalist Govindraj Ethiraj talks to Ashok K. Bhattacharya, Editorial Director at Business Standard.
SHOW NOTES
(00:00) Stories of the Day
(05:48) Markets are just 2.5% away from September peak even as record highs are predicted
(08:41) Rupee has best day in two years
(10:03) Luxury EV sales are zooming
(12:29) Are India’s PSUs really a source of value creation?
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Monday, the 30th of June, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital,
The Take: The Communist Manifesto of 2025
These two individuals may be quite far apart, but have very similar origins, tracing back to India via Africa. Zoran Mamdani, the 30-year-old, in a fight to become mayor of New York City, and Rishi Sunak, former Prime Minister of the United Kingdom.
Zoran was born in Kampala, Uganda, while Sunak's parents were born in Tanzania and Kenya. Sunak himself was born in England. And here's the first and important contrast.
Sunak worked as an investment banker with Goldman Sachs and various hedge funds before moving into politics. Mamdani worked as a housing counsellor and a C-list rapper, that's music rapper, before moving into active politics. But it's Mamdani and not Sunak who's in the news right now as Indian origin politicians making a mark in Western political systems.
But the differences here could not be more stark. Mamdani represents a radical departure from Sunak, or for that matter, most contemporary Western political and economic thought. Democrats rightly deplore the Republican Party for capitulating to Donald Trump and an agenda that threatens democracy and decency, but we'd better pause and note how our own party, the Democrats, is creeping dangerously close to an agenda that's equally outlandish and radical, wrote William Daley, White House Chief of Staff from 2011 to 12, and U.S. Commerce Secretary from 97 to 2000, in an article last week in the WSJ, or Wall Street Journal, titled, Mamdani is as extreme as Trump.
Mamdani is a member of the Democratic Socialists of America, or DSA, whose primary stated objective is the abolition of capitalism. If Karl Marx wrote his Communist Manifesto today instead of 1848, or some 177 years ago, I'm quite sure there would be striking parallels. From abolishing capitalism to state control of key economic levers, the similarities are actually quite astounding.
The manifesto then called for extension of factories and instruments of production owned by the state, while the DSA programme calls for nationalisation of railroads, utilities, finance, tech, and critical manufacturing. Both the manifesto and DSA want workers to have greater say and share, the DSA less so, and only in nationalised industries, as opposed to complete worker control in the move towards a classless society envisaged 170 years ago. Of course, the Communist Manifesto calls for the overthrow of the bourgeoisie and establishment of communism, which the DSA does not, as I could see.
But if I were to distill the spirit of all of this without getting into more excruciating detail, this is the India that we sought to build after independence, where capitalism was a bad word and socialism ruled the day. It took a crisis in 1991 to reverse the trend and bring us to the path that we are on today. A mix of capitalism and state intervention and ownership, but not enough of the former and perhaps more of the latter.
Which is why we should be careful about what lessons we take away from Mamdani's victory in the New York mayoral race. For instance, the DSA calls for nationalisation, as we said, of railroads, water, gas, electrics, telecommunications, media, and internet service providers, and other critical sectors. It also calls for similar nationalisation of institutions of monetary policy, insurance, real estate, and finance.
Now, while railroads and water could merit nationalisation or government ownership, arguing for ownership of telecom, electricity generation, and internet services could be counterproductive to both the nation and the consumers. Now, there is a nuance in all of this, which New Yorkers might do well to understand and also maybe learn from where experiments in socialism have worked and not. Of course, the DSA does not represent the Democratic Party's views, as the horrified Haley wrote in his article in the Wall Street Journal.
But this is not about New York, which has to deal with Mamdani and his dramatic arrival on stage, but India. As our upcoming discussion will show, India is still investing heavily in public sector units and extending state intervention in the economic sphere, though it also encourages private sector participation. But the problem is that the private sector has pulled back its capital expenditure in recent years, even as the government has spent more.
There is a $1 trillion new infrastructure pipeline that is underway. Something like 99% of it is government-funded. Infrastructure may be the preserve of the government, but there are many other businesses which are not so and should not be.
The government should be exiting more businesses than entering them, and the challenge of ensuring that capitalism is seen to play and actually plays a positive role in economic growth and wealth creation for all is upon us and our elected representatives. America is seeing polar opposites emerge in the form of Donald Trump nationwide and Mamdani in New York. These opposites also reflect people's choices of what they want and do not.
Mamdani has been dismissed by many as a social media phenomenon who became popular by making alluring TikTok videos about himself and his campaign message. Be that as it may, few successful politicians anywhere today can claim to have not benefited from the sheer reach and sometimes manipulation of social media. We must accept that the vote for Mamdani from the people of New York, the greatest city on earth, as many call it, home to Wall Street, the beating heart of capitalism and global financial markets, reflects shifting sands.
Freezing rent control in New York and redistributing wealth, as Mamdani has proposed, might sound socialist and communist to everyone else, but that is what many of the city's residents clearly want. The vote for him is also an indirect or maybe direct slap to capitalism for not fulfilling the promises that it was supposed to. And that is the lesson that elected representatives should absorb and take away carefully.
And that brings us to the top stories and themes.
The stock markets are just two and a half percent away from the September 2024 peak, even as record highs are predicted next month.
The rupee had its best day in two and a half years.
Luxury electric vehicle sales are zooming in India.
And are India's public sector units really a source of value creation?
Are The Markets Close To Record Highs
The NSE Nifty and the BSE Sensex now sit just two and a half percent before their all-time highs hit on September 27, 2024. The presiding view now is that fresh record highs are around the corner in the month of July.
The Indian markets, along with many others worldwide, have demonstrated astounding resilience, if not ignorance of everything, from tariff wars to real wars, instead focussing on the positives. Of course, the Iran-Israel truce is helping. On Wall Street, too, stocks have risen steadily after that big fall in April.
Both the S&P 500 and Nasdaq hit fresh records on Friday. Following a slide to the edge of a bear market, the S&P 500's over $10 trillion rally has defied Wall Street expectations, underscoring conviction the economy is withstanding policy uncertainties, a report in Bloomberg said. For India, this is mostly about the insulated nature of the economy and the macro-positives in recent months, like low inflation and interest rates and good rains with the monsoons now having covered the whole country earlier than scheduled.
Broader Asian markets were also strong on Friday after the US-China deal to fast-track rare earth shipments signalled easing trade tensions between the world's two largest economies, according to Reuters. So, back home once again. The NSE Nifty and BSE Senzix closed higher on Friday, thanks mostly to financials and metal stocks.
The indices were continuing their upward march for the fourth consecutive session, and thus obviously ending the week in positive territory. The Senzix has now closed above the 84,000 market, 84,058, up 303 points. The NSE Nifty 50 was up 88 points to 25,637.
All of this is on Friday. In the broader markets, the NSE Nifty mid-cap 100 and the Nifty small-cap 100 were up between 0.3 and 0.9%, respectively. So, for the week as a whole, the Nifty and the Sensex were up about 2%, led considerably or to a large extent by index heavyweights like Reliance Industries and HTFC Bank.
So, now the belief is that benchmark indices will hit record highs in July, thanks to sustained domestic flows, macroeconomic fundamentals, and some specific heavyweight stocks, including Reliance, Reuters said, quoting two brokerages. And then, of course, there's the foreign institutional investors who are also more active or have been active in the last few days. Meanwhile, capitalism is at work.
The paints market is seeing an attack on the decades-long monopoly enjoyed by firms like Asian Paints. Paint stocks have already fallen up to 31% over the past one year, over demand fears and supply excess that could see more churn, with JSW Paints acquiring a majority in Axo Nobel India. On Friday, it said it'll buy a little over 50% stake of the promoter entity, that's Imperial Chemical Industries, and a 24% stake of Axo Nobel Coatings International.
The paints industry, says an article in Business Standard, was already adjusting to the entry of Grasim Industries-owned Birla Opus, whose advertisements you can see now or maybe have been seeing in recent months. Elsewhere, the rupee had its best week since January 2023, as the Israel-Iran ceasefire cooled off oil prices and also slowed down safe haven dollar demand. The rupee gained about 1.3% on the week, its best performance in two and a half years to close at Rs.
85.47 on Friday, according to Reuters. Brent crude is just under $68 a barrel now. Meanwhile, the dollar index was also down 1.5% on the week as investors, unnerved by fresh signs of an erosion in US central bank independence, pushed the greenback back to its lowest level in over three years, says Reuters.
A note from MUFG Bank, quoted by Reuters, says part of the sell-off of the dollar is due to the unpredictability of policy from Washington, and that is unlikely to change. There is a contrast, though, that the rupee, while relatively strong, is still lagging its Asian peers, and currencies like the Korean won and offshore Chinese yuan are up between 2% and 9% this year, while the rupee has not changed much, says that Reuters report.
Luxury Electrics Are Doing Well
India's luxury car market is seeing an electric vehicle boom, growing now at a faster pace than any other segment, which also suggests that the well-to-do are opting for premium electric vehicles, which could also, of course, be a primary or a secondary car.
According to data from a government dashboard quoted by Business Standard, the share of EVs in the luxury car segment rose from about 7% in Jan to May last year to 11% in the same period this year, which is about a 66% growth. The overall numbers are still falling, but obviously the trend is important. A key driver for this has been a wave of new electric vehicle launches by companies like Mercedes-Benz, BMW, and Audi.
Santosh Iyer, managing director of Mercedes-Benz, told Business Standard that the market had moved from asking why EV to which EV. He said that he'd been driving an EV for the last two years and he doesn't miss an ICE or an internal combustion engine vehicle. He also said that the Jan to May numbers showed a 66% growth in luxury EVs and Mercedes-Benz had grown 73%.
The GST rate and road tax differentials offer a clear advantage for both mass and luxury EV segments, he said. Iyer has also told the Core Report in the past that EVs are better value because the tax component is much lower, so what you get is closer to what you pay for. EVs have, of course, benefited from the growing number of charging points and stations across the country and within apartment blocks in most major cities in India.
India's Top Food Brands
India's top food brand is Gujarat's dairy cooperative Amul with a brand value of about $4.1 billion according to the latest Brand Finance Report. Delhi-based Mother Dairy followed in second place with a brand value of $1.15 billion.
The ranking by UK-based consultancy Brand Finance puts Britannia at third, Karnataka's Nandini Dairy Cooperative at fourth, and Dabur at fifth in the list of India's top brands. So of the top five brands, three are government-owned or led. Amul, which is marketed by the Gujarat Cooperative Milk Marketing Federation, also improved its standing in Brand Finance's list of top 100 Indian brands, securing the 17th rank.
Mother Dairy was up six points to 35th, up from 41st. So the top brands overall for India are number one, Tata Group, number two, Infosys, number three, HDFC Group, number four, LIC Group, and number five, Reliance Group.
Are Public Sector Units Adding Value?
Returns and receipts from India's state-run public sector units have dwindled even as investment and loans to them by the Government of India has hit new records, a recent column by Business Standard Editorial Director, A.K. Bhattacharya, has argued.
Now this is contrary to perception. As a percentage of GDP, disinvestment and dividends from PSUs have declined. Instead, the government has been pumping in more resources into these PSUs, the column argues.
Specifically, the rise and fall in receipts from disinvestment of government equity in central public sector units rose from 0.2% of GDP in 2014-15, that's a decade ago, to a high of 0.6% of GDP in 2017-18. But over the next few years, it fell steadily to about 0.03% of GDP in 2024-25. The underlying question that runs through these findings is, of course, how and how much energy and resources should the government be expending in the business of doing business? The column points out that in the last decade, only three PSUs have been privatised, including Air India.
Instead, the government has been infusing fresh equity into some of them, like Russia, Ispat, Nigam, and Enterprise it had earlier proposed to privatise. So the bottom line is this. The article says that while the government argues PSUs are a source of value creation, the numbers are saying, or rather reiterating a different story.
If you were to look at disinvestment and dividend, the government's total receipts from disinvestment and dividend from public sector units over this period of 10 years fell from 0.45% of GDP to 0.25% of GDP. And in contrast, as we've said, the government has been increasing its capital allocations for public sector units through equity and loans from about 0.5% 10 years ago to about 1.66% now. And this is unprecedented.
Of course, the investments in PSUs, including in railways, telecom companies like BSNL, MTNL, the oil majors, and others like the National Highway Authority of India is linked to the government's public expenditure push, but it is the size of it, which might come as a surprise going up from about 67,000 crores in 2014-15, that's equity and loans to public sector units. At that time, about 34% of the total capex or capital expenditure of the government to about 54% at 548,000 crores in 24-25 of a total capital expenditure of 10 lakh crore rupees or 10.2 trillion rupees. In some, says the column, the government stated policy of treating PSUs as a source of value creation has given it very little additional revenue over the last decade.
In the middle of all this, not surprisingly, perhaps the private sector has been holding back. A report in Bloomberg just last week points out that India's private sector capacity expansion intentions have fallen to a three-year low. Banks' exposure to industries that used to be some of their biggest borrowers, roads, powers, telecom, ports and airports, construction, property builders, is down to 11% of their loan book, half of what it was a decade ago.
I reached out to Ashok K. Bhattacharya and I began by asking him how he was seeing the larger strategy of state-run enterprises and their role in the economy.
INTERVIEW TRANSCRIPT
Ashok K. Bhattacharya: This is a bit of a startling revelation that I made while looking at the numbers for the last 10 years. What it told me is that while the government stated policies to treat public sector undertakings as value creators, actually when it comes to dividends and disinvestment receipts, how the PSUs can really create value for the government, they've actually been falling in the last 10 years. If you look at it in terms of a percent of GDP, disinvestment has begun well in the first three years after the Modi government came to power, from 0.2% of GDP in 2014-15 to 0.6% of GDP in 2017-18. But since then, they have fallen dramatically and they have come down to 0.03% of GDP in 2024-25, which is last year. If you look at dividends, they have been steadily falling from 0.45% of GDP in the beginning of the Modi regime in 2014-15 to 0.25% of GDP last year. But in sharp contrast, the government has been pumping in a lot of money to the PSUs through equity and loans.
They have gone up sharply, quite in contrast to what the previous regime of Manmohan Singh for 10 years did. I mean, in Manmohan Singh's time, the government's contribution of PSUs and loans, equity and loans to PSUs, actually rose very, very marginally, from around 0.5% to 0.6% of GDP. But in the Modi government's 10 years, you have seen that going up from 0.5% of GDP to 1.66% of GDP. Just to give you a sense of why 1.6% of GDP is so large, the government's total capital expenditure was about 3.1% of GDP last year. So almost half of your total CAPEX is composed of your PSU equity and loans. So the PSUs clearly are playing a bigger role in gobbling up a large part of the government's CAPEX, whereas in terms of giving back in return through dividends and even disinvestment, their share is steadily falling.
So it's quite a stark picture.
Govindraj Ethiraj: So in absolute numbers, the investments from what I could see from your article, 67,000 crores roughly 10 years ago to about 548,000 crores today, the government's investment?
Ashok K. Bhattacharya: Absolutely, absolutely.
Govindraj Ethiraj: Which one is about half of the total CAPEX?
Ashok K. Bhattacharya: Yes, because the total CAPEX is around 10 lakh crores.
Govindraj Ethiraj: Which you're saying is about 3.1% of GDP?
Ashok K. Bhattacharya: Yes, that's right.
Govindraj Ethiraj: Okay. If I were to ask a more conceptual question, what is wrong with this?
Ashok K. Bhattacharya: Well, there is nothing wrong if your stated policy is to pump in more money into PSUs and let them occupy the commanding heights of the economy, if that is your policy. But what we have seen from the 1990s reforms, which were to be continued by all governments, and even this government committed itself to the idea of disinvestment and privatisation. As a matter of fact, in 2021, the Modi government talked about privatising as many as six PSUs.
They came out with their privatisation policy as such, wherein the government was not supposed to be the owner of public sector undertakings if they were not in strategic sectors. So, if you see it against that strategic policy that the government had announced, you see a deviation. And even otherwise, you would like to see the government creating an environment in which the private sector and the larger part of the economy operate with greater freedom and greater returns, rather than government using up its resources for financing a few public sector undertakings, which goes against the spirit of reforms, which the government should not be in the business of running businesses.
Govindraj Ethiraj: Right. So, going back to, let's say, the government's stated intentions over the recent years, which is obviously to have or push public expenditure. Could it be argued that this is a more efficient way of pushing public expenditure through public sector units, which are relatively more accountable, rather than, let's say, more anonymous government ministries and arms of theirs?
Ashok K. Bhattacharya: It appears efficient, but actually it is an indirect admission of the government's failure to create agencies and mechanisms by which the CAPEX can be absorbed more effectively and efficiently. So, it is easier, certainly, to pump CAPEX through the equity and loans route into the PSUs, but ideally, it should be done through agents which can get you better returns and spread the resources in a decentralised manner. Now, consider the manner in which the road infrastructure is being planned.
There was a time when there were more roads that were built through private sector and public sector participation, which is the public-private partnership. Now, you don't see the same role that has been accorded to public-private partnerships in infrastructure building. Why?
Because either large chunks of the private sector probably feel not very comfortable with the idea of the ease of doing business that has been created in the country. And then aside, I would say that you see Indian companies are investing more abroad, the investments are more abroad than they are doing here. So, what's happening is that probably the government feels that it is easier to invest money through the public sector entities because they are, after all, owned by the government, but whereas you could have greater multiplier effects of government money being invested in infrastructure and other areas if you had joined hands with the private sector and maybe used private sector agencies to use those resources more effectively. Yes, I agree with you. It makes it easier for the government to invest money, but I think it points to larger deficiencies, I mean, more problematic deficiencies of the Indian system.
Govindraj Ethiraj: I'm sure there's a chicken and egg situation also because the private sector has been part of infrastructure creation, including on roads, but has vacated that spot. Now, is the government in a very large sense trying to fill the spot or is it crowding private investment out? Or because it crowded private investment out, is it now trying to fill the spot?
Ashok K. Bhattacharya: I think it is too early to answer that question right now. We are seeing a transition. We are seeing how the government is trying to sustain its CAPEX programme largely through the public sector route. And my understanding is the government is obviously conscious of the private sector's reluctance to invest and take part in the investment processes within the country.
And what we do see from these numbers is a confirmation of how the private sector is a little reluctant to invest and the government is meeting its investment targets through the public sector. So, therefore, there is a need for a closer look at why it is not happening. It is important to find out why many private sector companies are investing abroad, but they are not showing some reluctance to invest here.
So, is the ease of doing business principle needs to be made a little more useful and a little more effective? Now, these are all policy issues, whether the factor market reforms should be revived, whether the labour courts that were passed by Parliament and we were hoping that they will be notified by the government in consultation with the trade unions and the state governments, why there is a considerable delay on that. They were passed in Parliament in 2020, but five years have gone by.
They are yet to be notified. There are issues about the land acquisition laws, agricultural reforms. There are so many issues of reforms still pending.
So, investment may have to start because of those reasons. So, I think considerable discussion and introspection should take place. These data only drive us to that point.
Govindraj Ethiraj: Right. So, a lot of these companies, like, for example, oil marketing companies come to mind, are recipients of a lot of this capital push or capital expenditure push. How do you feel?
I mean, I know you're not a, I mean, you're not an investment analyst, but just as a thought, because many of these companies have investors in them, I mean, investors like you and me. And unlike the private sector, these are obviously receiving a lot of capital and maybe direction. And they've also been seen as attractive.
Like, for example, if you see defence stocks or stocks connected to aerospace, they've all shot up in the last couple of years. So, essentially public sector unit stocks have been seen as attractive in the market. But when seen through this lens, they actually seem maybe capital inefficient or let's say maybe not the best receivers of that capital.
I don't know whether you've given this any thought.
Ashok K. Bhattacharya: You have summed it up quite well. What is happening is that the capital market, the stock market, the investors, are not worried about this development. I mean, for example, just a couple of days back, Mazagon Dock acquired a company in Sri Lanka. Now, Mazagon Stock, remember, is a listed company.
Now, if it is a listed company, but it is a defence PSU. Now, obviously, stocks will go up. But then looking at the stock market and looking at the investment returns of a company is only one way of assessing the way money is invested efficiently and effectively.
So, I think there are various ways of looking at it. And certainly, this is one way.
Govindraj Ethiraj: Right. AKB we've run out of time. Thank you so much for joining me.
Ashok K. Bhattacharya: Thank you. Thank you, Govind.
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A report from the Press Trust of India says the finance ministry has now asked public sector banks to look at monetising their investments and subsidiaries by listing them at bosses after further scaling up operations so that they realise a good report. There are about 15 subsidiaries or joint ventures of public sector banks lined up for initial public offering or disinvestment in medium to long-term, according to sources who spoke to PTI.
Examples could include State Bank of India, which is the big bank, and their subsidiaries like SBI General Insurance and SBI Payment Services, as they scale up their operations. Now, how this will happen and when, of course, we do not know at this point.
