Markets Mostly Fend Off H-1B Shock
The markets were expectedly down on Monday, but not as bad as one would have thought
On Episode 685 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajay Bagga, Veteran Market Expert, Dhairyashil Patil as well as President at the All India Consumer Products Distributors Federation (AICPDF). We all feature an excerpt from our series ‘Eye on Retail’.
SHOW NOTES
(00:00) Stories of the Day
(01:00) Markets mostly fend off H-1B shock, IT stocks have mixed response
(02:24) Gold hits fresh high, will dampen festive season purchases further
(17:10) New GST rates kick off, FMCG majors absorb losses, traders expect a big boost
(24:24) Two Thirds of Gen Z consumers say that they look for social media for product discovery Our new series Eye on Retail focussing on India’s ecommerce growth story
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 Tuesday, the 23rd of September, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.
Our top stories and themes.
The stock markets mostly fend off the H-1B shock. IT stocks have mixed response.
Gold hits a fresh high, will dampen festive season purchases further.
New goods and services tax rates kick off. Fast-moving consumer good majors absorb losses and traders are expecting a big boost.
Two-thirds of Gen Z consumers say that they look for social media for product discovery. Our new series, Eye on Retail, focussing on India's e-commerce growth story.
H-1B Sends Jitters
The markets were expectedly down on Monday, but not as bad as one would have thought after US President Donald Trump's new H-1B visa fee rules triggered some panic selling amongst investors, particularly shareholders of IT companies. The nifty IT index was down 3% and so were major technology stocks that lost about $10 billion in combined market capitalisation. Large-cap IT stocks lost more, even as traders and analysts attempted to analyse the precise impact of the new rules as and when they would take effect.
Companies like TCS have, amongst the IT services companies, the highest exposure in terms of engineers onshore with H-1B visas right now. The Sensex ended at 82,160, down 466 points. The nifty was down to 25,202, which is down 125 points.
The broader markets were also down. The nifty mid-cap index was down 0.6% and the nifty small-cap about 1.1%. The rupee closed slightly weaker on Monday as the visa norms weighed on markets and pulled on IT stocks, as we just discussed, with traders expecting the currency now to stay under pressure until there is progress on US-India trade talks, according to Reuters. Of course, the financial markets as a whole are waiting for more clarity on US-India trade talks, and the Indian Commerce Minister is now in the United States, so let's see what comes out of that.
Now, the rupee closed at Rs.88.30 against the US dollar, which is down about 0.2%. Gold has now hit another record high on Monday. Spot gold rose to about $3,726 per ounce after hitting a new record of $3,728 per ounce, according to Reuters. As prices in India rise in sync and cross the 110,000 per 10-gramme mark, there will be a definite impact on festive season purchases.
Consumers are down-trading to lower-carat gold like 14-carat and even 9-carat, as industry analysts have told us earlier. But this festive season is obviously not going to see or unlikely to see the kind of demand that we've seen in the past, given the high prices or demand will shift across carats. The fall in India's banking system liquidity surplus is expected to ease over the coming days, which is also to inform you that there was a problem with the liquidity surplus as government spending and bond redemptions offset the impact of recent tax outflows, according to analysts quoted by Reuters.
The liquidity surplus had declined to 70 billion rupees on September 21st, the lowest since late March after about 2.6 trillion or 260,000 crore rupees moved out because of income tax and goods and services tax payments. And the amount of money in the banking system influences market interest rates, including those on consumer loans, says Reuters. As we've discussed on a few occasions earlier, this week we'll see the completion of a year since the stock markets hit their all-time highs on September 26th, 2024.
Now we are yet to recover those highs, but what's the last year been like and what can we take away from the last year that will inform how the year ahead or at least the next few quarters will look like in the stock markets? I spoke with veteran market analyst Ajay Bagga in some detail and I began by asking him for his takeaways and also touched on how he was seeing the impact of the new H-1B visa fee regime on Indian IT stocks.
INTERVIEW TRANSCRIPT
Ajay Bagga: We have been an underperformer market, if you see the all-time highs that we hit last September have not been conquered again. We have not even reached them over the last 12 months and we are ending these 12 months below those levels. So, overall, it's an underperforming market.
It was at the higher end of valuations. The immediate catalyst post that September all-time highs, if you recall, was China rolling out some stimulus measures. And we saw FPI outflows and inflows started into the underperforming Chinese market.
And China has given a very good return over the last 12 months. Korea, China, Taiwan have been leaders, along with Japan and Europe, which have done quite well. The Indian market really stands out as a market which lost market share in terms of FPI flows.
And secondly, we underperformed from a very high valuation standpoint. The main reason was the earnings. The earnings were quite tepid.
And there the reason goes back to March of last year. As the national elections were announced, we saw that project flows really slowed down. The government expenditure slowed down.
It started picking up around August. Then by December, we were really doing well in terms of government expenditure. But those last 4-5 months came home to roost in terms of earnings being a little underwhelming.
And then big sectors in the Indian market like IT got buffeted by global issues. And we saw IT earnings also being flattish and very underwhelming. Those are the main reasons that the Indian market underperformed.
Govindraj Ethiraj: Right. So let me pick on a couple of points that you've raised. So let's talk about flows and particularly foreign institutional investor flows.
So you did talk about how a lot of money has been moving to markets like China, Korea. Japan and we've also seen highs in those markets. So my question really is, is this a secular change?
I mean, one of the questions is really, is this a secular change in terms of the way funds have now moved out from India into other Asian markets? And to that extent, where does India look like it's standing where we are today?
Ajay Bagga: I would say it will not be a very long lasting change. So it's not structural in that sense that India will stay out of favour. But when you have a single digit price earning market ready to break out, obviously some amount of funds go there.
So we did lose out because our valuations were very frothy. And that would have been justified as it has been for the 15 years before last year. We had a justifiable high valuation because we had the growth.
Now in a year where the earnings growth did not really keep pace, then there was a re-rating of the market. So I would say it was more of a course correction that has happened. As the earnings pick up again, we should see those flows turn positive.
And one more point I would make is that we saw a very huge supply of fresh paper as well as promoters continuously cashing out private equity funds, VCs cashing out. That has kept a lot of pressure on the markets because a lot of the liquidity from the market goes off in terms of these. So even now we are seeing primary issues really bunched up.
This week on one day, 10 issues are opening up. So that is more pointing towards a late cycle in the primary markets when everybody is trying to cash out. And that's normally not very good for the secondary market in the short term.
But what it does create is this froth will lead to a lot of poor valuation happening and that will lead to post-listing disasters and the markets will course correct. But right now it's a very massive IPO market which will pull out liquidity from the secondary markets as well.
Govindraj Ethiraj: Adding to your point on liquidity and flows. So we've seen a huge amount of flows in the last year. So the figure that was put together was $90 billion of domestic buying while of course there was foreign institutional selling.
So the argument that flows can drive markets or support markets doesn't seem to be holding anymore. Would you agree?
Ajay Bagga: FPI flows are not driving markets, I would say. But in the absence of these domestic flows, markets would have connected very fast. If we had gotten down to 15-16 times price earning, the FIs would have returned faster.
So to that extent, the SIPs are giving a bottom to the market. They're not allowing the markets to correct too fast. But unless you get growth, the other selling, say the promoters, the way they have sold 200 to 50,000 crores, that has led to some amount of suppression of the secondary markets.
Then the PE and the VC funds also cash out. So there has to be a seller. If there is a buyer of $90 billion, there has to be a seller on the other side.
That is what the reaction is. So we have seen HNIs also are under-invested and we have seen FPIs on the margin being net sellers. That has been where the money has been going out.
Govindraj Ethiraj: Right. So let me come to earnings and valuations. I know that it's tough to ask a question about September 2026.
But in a broad sense, how are you looking at earnings right now or earnings recovery right now, which in turn could lead to markets maybe picking up?
Ajay Bagga: I think the GST delay between the August 15 speech of the Prime Minister and 22nd September, the GST cuts coming into play, has meant that some amount of big ticket items did not get purchased in that period. So you could see a softish this quarter as well. Our earlier thesis was that the June quarter has made the bottom for the cycle.
And from here on, things should be better. So we were expecting better earnings for September. But there is a nearly 37-38 days difference between the announcement of incoming GST cuts, then the GST Council meeting, and then provision of another 18 days to allow the market to adjust the prices.
That has meant that the element of surprise went off and some of the big ticket items could see a fall in August and early September. How much that gets bought in this week, I think that is very critical. We are seeing bunched up car sales today.
For example, wherever dealer reports are coming in, as opposed to say 10 cars a day, dealers are selling 400 cars today, tractors are flying off the shelf. So maybe that demand for 35 days was really dovetailed into today. And we'll see some pickup.
But definitely in October, there should be a big pickup in consumption. This week's numbers, if we can get to see a pre-September 22nd and post-September 22nd number, that would help decision-making. We won't get that.
It will be anecdotal. But come October with Diwali, this consumption boost should boost market sentiments as well. So if not June, definitely September for the cycle, we should have made the bottom of the earnings.
Govindraj Ethiraj: Last question, Ajay. So we've been seeing a lot of news on H-1B visas. Now there have been clarifications, and it's clear now that it's not going to be as bad as it first sounded.
But there is definitely going to be some impact, including potentially cascading. How are you reading it as of now? Also in the context of the weightage that some of the big IT stocks hold in the benchmarks.
Ajay Bagga: Yeah, it is bad news because the way it came out on Friday really blindsided the market. Only one day's notice was given. A lot of panic.
If you see, a lot of big companies put out travel advisories and get-home-quick advisories. Then the White House did its taco move and said it will be only next year. We don't know right now.
Of course, there's an FAQ put out by the Immigration Services. I still have to go through that. But there are people in the limbo who had come home to get their passport stamped, which is normally a routine thing.
You have to just go to the consulate and get it done. But we don't know on re-entry, will they be asked for 100,000 or will they be just flagged through? That is one worry point.
But overall, if you see directionally, the move is anti-immigrant. If you want to work in maths, Govind, 141,000 H-1B fresh visas were issued last year. If you charge 100,000 on that, you're talking $14 billion that the companies would need to spend.
Nearly about 260,000 H-1B visas were renewed last year, which is basically this year. I'm talking about last season. Now, if you start charging on renewal $100,000, which they are saying once you petition again, which used to be a standard thing that you get for three years, then you get three more years, then you roll over three years, and you move to an L-1 or you get a green card or something.
Now, if that is charged, it's another $25 billion. Where is the money? Will companies have the margins?
I don't think so. So, you will not get as many H-1B petitions next year. That was the logic of this move.
Margins come down. You will have to reject delivery processes, delivery models. So, whether you move to Vancouver or Toronto, or you move it back to India, basically, these people are there because the clients have demanded some onshore support.
Now, most of these, which are the higher end, will move to L-1s. I don't know if L-1s will be really given in a rush or even if the L-1 window will close down. The risk is fresh people are taxed, then you start taxing the existing people, then you start questioning naturalised citizens that even 10 years, whoever has been a citizen has to pay.
It becomes a toll tax to the American dream. That is the big issue. Immediately, the markets are quite efficient.
They are down stocks from 3% to 5% on Friday night. It reflected in the ADR and the cognizants and all who are listed in the US got hit. And then today, again, we have seen the hit in the Indian markets when they opened.
Does it stop here? Or does it leads to more disruption of the business models? That's the question.
There is talk in the US of that Hires Act, which basically wants to put a 25% tax on all outsourcing. That will break the bone of the entire outsourcing model. And then second order effects on Indian real estate, Indian consumption, all those things come in because of the outsourced model, we have millions of workers working in India.
That way, I would say it's not gone. It's a developing situation, very difficult to forecast and nobody's going to give us a free pass. So wherever someone can hurt you, hurt your business model, to show their voting base that something is being done, it will happen.
That is what we have to assume. So looking forward to more management commentaries and we'll be asking these questions in the earnings calls to managements to figure out what their scenario is forecasting for this 100,000. And then in case something like the Hires Act comes out, how are they going to deal with it?
And what are the big American companies going to do? We are running 1,800 GCCs right now in India. That's going to go up to 3,000-4,000.
But if they can't handle the work because of a 25% toll, what will happen to all those facilities?
Govindraj Ethiraj: Ajay, always a pleasure. Thank you so much for joining me and sharing your thoughts.
Ajay Bagga: Thank you so much.
Will consumers step up buying?
The new goods and services tax rates kicked in yesterday and could lead to a savings of about 13% in household bills for groceries and daily essentials, while a small car buyer could save about 70,000 according to government estimates quoted by the Hindu newspaper. According to the same estimate, stationary clothing, footwear and medicines purchases would bring in savings of seven to 12%, while savings would go up to 18% in the case of individual health and life insurance policies, which have been exempt from GST as of yesterday.
Prime Minister Narendra Modi on Sunday in an address to the nation welcomed the Next Generation Reforms and congratulated citizens on what he called the GST Savings Festival. On Monday, he also appealed to shopkeepers and consumers to buy and sell products that are made in India, emphasise self-reliance as the path to achieve the goal of developed India and said GST reforms will help in strengthening the local manufacturing base. Speaking of shopkeepers, I reached out to Dairishal Patil, President of the All India Consumer Products Distributors Federation or AICPDF, and I asked him how he was seeing consumer demand now and sales as the new rates kicked in on Monday.
INTERVIEW TRANSCRIPT
Dhairyashil Patil: This is a very, very encouraging situation right now. The market is geared up. The consumers are very excited to see whatever is going to come down.
And most of the things, majority of SMCG things have come down from 18% to 5%, vice versa from 12% to 5%. So now almost 60 to 65% of SMCG products have come down to 5% all put together. So the market is reacting very well.
So we have yet to come out with any other information such as what the sales are and how excited the people are right now. Let us wait and watch. We are also very eager to get all the reports per day.
Govindraj Ethiraj: Right. So the announcement for GST was made by the Prime Minister on the 15th of August and 22nd of September that the rates have finally kicked in. I know these are small ticket items compared to cars, refrigerators, air conditioners and so on.
But did you see any holding back in purchases? Were there any shifts in the last month or so?
Dhairyashil Patil: See, almost of all the FMCG companies, there was a bit of a panic initially after the announcement. Till 8th of September, companies were trying to understand exactly what the changes were and how the changes should go and reach the end consumer. So by 8th, almost all of the things were clear as to what is going to happen to the ITC, how the consumers will react, and how it will be provided to the consumer.
Almost from 10th of September, top FMCG companies had started giving a quantity purchase scheme into the market to the retailers at lower rates. That is equivalent to the reduction of tax rate which has happened. For example, if it was an 18% product and came to 5%, that was reduced to say about 11, 11.5% to be on the reduction side. If it was from 12% to 5%, then 7% was reduced in it. So companies tried to match the prices which are going to be post 22nd. Last these 10 to 12 days, the inventory into the market, at least 80% of the inventory has already been changed.
So starting with the 22nd, I don't feel that there would be a lot of problems for a reduced weight to be given to the consumers. So the FMCG industry was fully ready and active.
Govindraj Ethiraj: Right. And there was a lot of buildup of inventory which usually is the case at this time because this is festival season. So I'm assuming dealers have bought products at higher prices than they have sold or will sell.
How is that gap being managed at this point?
Dhairyashil Patil: See, as on the products which are there, the bills which were made till 21st, the dealers had received an 18% whatever ITC they had accumulated. So the only issue was the transaction of closing stock from 21st to 22nd, which the companies have already brought down the stocking level to bare minimum range. So I believe that won't be a big issue for the distributors because any which ways they are going to get all their entire ITC whatsoever.
So that will be recovered in the coming months.
Govindraj Ethiraj: Okay. And we're also in the festive season. So while this is supposed to have given a boost to overall consumption, what's your sense as you look at, you know, the festive season beginning, let's say Ganesh Chaturthi and on to now Diwali, which is next month?
Dhairyashil Patil: See, we were almost at the end of Ganesh Chaturthi because this thing came in on 3rd or 4th. And then we have this Pitru Paksha or Shraddh, 10-15 days of Shraddh where normally shopping is on the lower side. So now it is going to pick up because a lot of people are waiting for 22nd and we have already started.
We have already started the Navratri, the Sera season. So the sales are going to just pick up from today till Diwali ends. And as always, quarter three is the highest quarter for FMCG sales.
So in both ways, we have a festive season. We have this discount Bonanza and plus we have two big major festivals in this coming month. So we are very, very optimistic about the sales and this reduction of price will naturally give a boost to this entire sales phenomenon.
Govindraj Ethiraj: Right. Last question. So if you were to normalise compared to, let's say, last year and look at the whole quarter, would you feel that sales numbers are likely to be slightly higher, much higher, dramatically higher?
Dhairyashil Patil: Going, you'll have to take into consideration the 13% down of pricing. Now to gain the value year on year, they'll have to cross 30% in growth. So expecting a value growth for a company, I believe, will be very, very optimistic.
But still volume growth can be expected in this season. But the price drop is very, very huge. So on average, it is a 10% to 20% price drop.
And in the last at least four to five quarters, if you have seen, almost none of the companies have crossed any double digit. With a double digit downfall on value, we cannot expect to have a very growing season. But yes, we'll have volume growth.
Govindraj Ethiraj: Right. Dhairyashil, as always, wonderful talking to you. Thank you so much for joining me.
Dhairyashil Patil: Thank you. Thank you very much.
An Eye For Retail
E-commerce majors are kicking off the big annual sales ahead of Diwali next month, and perhaps it's timely that we're also kicking off our special series, Eye on Retail, where we decode the present and future of India's e-commerce. Over the last decade, e-commerce in India has grown from a niche urban convenience to a nationwide growth engine and reshaping how we buy, sell, work, and connect. With rapid policy shifts and technological strides and mass digital adoption, it has become an important pillar of India's economic growth story.
In this first episode, we take a step back to zoom out on this transformation, exploring how India's digital commerce story stacks up globally and what it tells us about the future of retail. I spoke with Manan Basin, partner of Bain & Company, and Sangeeta Gupta, senior vice president and chief strategy officer of NASSCOM, and I began by asking them about the innovation ecosystem that they were seeing and what could take it forward.
TRANSCRIPT
Govindraj Ethiraj: So, Manan, let me start with you first and Sangeetha, I'll come to you for the last word. So, Manan, when you look at some of these opportunities that you've talked about in our conversation just now, in your report earlier, a lot of this, addressing this, whether it's the distribution, the logistics, the kind of products, making it attractive for people, creating the fintech enablement and the simplicity of transactions, all of that will be driven by the innovation ecosystem. So, tell us about what are your two or three key tasks or desires which you think will help fuel this journey?
Manan Bhasin: To be honest, Indian entrepreneurs don't need my guidance and I think they're incredibly adept at figuring out exactly where the gaps are and what is required. And going back, I must say that we met some fascinating entrepreneurs who are really trying to do some very interesting things in trying to build for India. I spoke earlier about so many consumers actually being online and on social media.
One of the big things that we've seen is this whole idea of creator commerce emerging because a lot of consumers, specifically younger consumers, are looking at creators for inspiration on what to buy. And simultaneously, that's actually where time is being spent. Ultimately, it is obvious that some of the shopping starts there.
So, if I look at Gen Z consumers, for example, almost two-thirds of them say that they look for social media for product discovery. And in that light, I think building for creators and creating creator commerce engines becomes quite interesting and important. There's companies such as BishLink which are doing some very interesting work on this.
And equally, a lot of platforms, I know Myntra is doing something like Glam Street, for example, Flipkart is trying to do its own version of it. And a lot of platforms are doing it, but it just becomes very interesting. This portion, by the way, live commerce, creator commerce, is humongous in China and Southeast Asia.
It's just not really taken off in India in the same way for a variety of reasons. But that's probably one angle. The other thing I would say, which is this wave of AI, as search migrates from...
There was a time when product commerce search was migrating from Google to Amazon in the US and into Flipkart in India. From there, how do you actually go towards the... It's today beginning to happen on ChatGPT, et cetera.
If you look this morning, there's an announcement by Sam Altman about an agentic AI in the context of shopping. How do you actually make those pieces tie together? What are the kinds of businesses that you can build around it?
I often say that the best or most interesting businesses are not built by the rising tide. It's just a lot of businesses that get created in the process of that. The enabling ecosystem is really where a lot of the value creation can happen.
Govindraj Ethiraj: Right. Sangeeta, to you, the question is the same. Where do you see the innovation ecosystem plugging in and powering e-commerce growth?
But let me also bring in some of the points that you mentioned earlier when you talked about some of the concerns, including on areas like dark patterns, on fraud, and basically giving customers the sense that what they're doing or transactions that they're doing are safe. These are problems that have to be addressed, too, in order to overall grow the market and make more consumers happy.
Sangeeta Gupta: I think I'll start with the second part of the question, Govind, which is really about building trust in the ecosystem. That can be an ongoing task, right? Because in a retail place, you could go, you kind of knew the jewellery shop owner, so you knew he was trusted and he was in your family for years.
Now, if you're buying from an online shopping place, you will have hesitation on buying a high expensive luxury good, which is the affluence point that Madan talked about. So I think building trust is going to be an ongoing effort that people will need to do. I think there also needs to be a system where when there are frauds happening, there is a way to figure out and quickly make sure that the person who's doing the fraud is penalised appropriately and not just saying stop this activity, but there is a system of penalties that will work to make this happen.
And of course, I think the policymakers have to stay ahead of what are the likely issues that will come up. So I think as NASSCOM, we keep talking about these regulatory sandboxes, right? So keep creating these sandboxes in partnership with the e-commerce companies by saying what are some of the things that we should be careful about and how you build for that.
So I think that's how we'll have to think about the policy ecosystem from an e-commerce perspective. The first part of the question on what really lies ahead for the innovation ecosystem, I think Madan covered the whole creative economy point and I think the Adobe CEO who was in India recently also talked about the future unicorns are going to be the creators and not necessarily the past type of unicorn. So clearly, I think that's a big big opportunity that India has.
The second is really how do you see some of the more established retail organisations and more traditional retail partners with the innovation ecosystem in India? Because today it is more about I'll build my own and whether I succeed or fail, that's my journey. But I think in India, there's a lot of, I mean, it's changing and we have one of the big fashion houses who's working with us on saying I want to build the agentic AI solutions for my business, but I want to do it quietly.
I don't want to talk about it. How do you drive that whole collaboration ecosystem? Because again, you know, if e-commerce and retail has to succeed, you need all the players to come together.
So I would put those two as my top priorities.
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And this segment was supported by Flipkart.
You can watch the full conversation on our YouTube channel. The link is in the description, and also listen to it on your favourite podcast platform.
