On Episode 958 of The Core Report, financial journalist Govindraj Ethiraj talks to Alok Agarwal, Deputy Chief Investment Officer at Alchemy Capital Management. We also feature an excerpt from our episode of How India’s Economy Works featuring Vidya Mahambare, Professor of Economics at the Great Lakes Institute of Management in Chennai.

SHOW NOTES

(00:00) Stories of the Day

(01:00) Why Markets Are Bracing For US Sanctions On Iran

(03:59) Has China Passed Its Peak Demand For Oil Last Year Itself?

(05:48) Will This Year Be The Weakest Monsoon In 20 Years?

(07:11) The Crossover Theory On Yesteryear Stocks

(15:14) The Unintended Consequences Of India's Rural Homes Subsidy

(26:24) India’s Aviation Market Is Contracting Right Now

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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 feedback@thecore.in.

Good morning, it's Tuesday the 25th of August and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai India's financial capital.

Our top stories and themes

Why the markets are bracing for US economic sanctions on Iran?

The crossover theory on yesteryear's stocks

Has China passed its peak demand for oil last year

India's aviation market is contracting right now

why government subsidies for homes should be encouraging to build closer to where the jobs are being created, particularly in urban and semi-urban areas

And will this year be the weakest monsoon in 20 years?

Markets, West Asia, Oil and the Rupee

The US has threatened an economic war against Iran to substitute the actual war it has already waged since the 28th of February or for six months with quite evidently no real conclusion in sight.

The economic war is intended to hit countries that trade in Iran as well and buy its oil or presumably export products to it. Now, India imported oil from Iran in April and May this year for the first time in seven years thanks to sanctions and the value was about 700 million dollars according to the global trade research initiative. Now, India imports from some 40 countries so stopping crude imports from Iran may not make a difference as such but the more important point is that India could once again face sanctions or the threat of them from the US and thus we're back to square one or somewhere close to that.

Remember the much promised bilateral trade agreement between the two countries has not materialised and that suggests that the US-India relationship continues to be on the rocks despite all that is being said by all those who are saying it. With all of this in the backdrop, the indices were down particularly as geopolitical tensions increased after Iran said it would seize vessels and change transit rules for the state of Hormuz ahead of the said economic war's commencement. The Sensex was down 171 points to 77,369 and the Nifty 50 was down 32 points to 24,219.

In the broader markets, the Nifty mid-cap was up slightly and the Nifty small cap was down slightly. Meanwhile, a flood of initial public offers, IPOs, like before is said to keep the market suppressed assuming it overcomes the rest of the factors. India's IPO markets are heading for their best month on record despite a lacklustre stock market as ample domestic liquidity continues to drive demand for new shares according to a Bloomberg report which added that about 10 billion dollars of deals have been priced in August led by the government's $3.2 billion sale of shares in life insurance corporation Manipal Health Enterprises' $950 million initial public offer among several block trades and institutional placements, the Bloomberg report said adding that local mutual funds and insurers, retail investors and returning global funds and portfolio investors have all helped.

And this strength is obviously something that could help or provide tailwinds for other major offerings expected this year including from the National Stock Exchange and Jio platforms. The secondary markets of course have been subdued with the Nifty 50 little changed from its level two years ago. Four of the companies that debuted in August are now trading below their IPO prices according to the Bloomberg report.

Elsewhere, the rupee was weak on Monday as the Reserve Bank of India appears to have reverted to its old strategy of keeping the currency floating in a thin band albeit now at lower levels. The rupee closed the session on Monday at Rs 95.74 per dollar and it was moving inside a range of about 10 paise through the session according to Reuters. Gold has now risen to its highest in more than three months on Monday even as a muted dollar boosted appeal according to Reuters which added that spot gold was at about $4,649 per ounce on Monday morning.

Now here is an interesting development based on a statement. China's top oil company and refiner has said that China's oil demand probably peaked last year earlier than previous estimates according to a Bloomberg report. Clean energy development, electrification, and low carbon goals mean the country's oil demand has probably crested according to Sinopec's chairman who was speaking on Monday at an earnings briefing in Hong Kong.

Sinopec is China Petroleum and Chemical Corporation and it said on Sunday that road fuel demand had fallen sharply in the first half as consumers shied away from higher prices and shifted to electric vehicles and this of course is something that we are seeing at a slightly smaller scale in India too. The declines could narrow a bit in the second half because of supportive economic policies according to another Sinopec official. Sinopec also said it's diversifying crude sources away from the Middle East while working with suppliers in the region on shipping routes safe from the West Asian war.

Meanwhile Bloomberg also reported Total Energy's CEO Patrick Poyen saying the global oil market has diverged fundamentally with a bearish outlook for crude but bullish prices for products. Crude cargos are able to transit the state of Ormaz very quietly today but the higher cost of shipping means that no refined products are making the journey he said. Total is one of Europe's largest energy companies.

He also added that Ukrainian drone attacks have significantly curbed fuel supplies from Russia. Meanwhile the CEO of Shell PLC said the market for oil products was being squeezed by the triple threat of Russian refinery attacks and the dangers to shipping in the Persian Gulf and Red Sea. Meanwhile oil prices fell on Monday as traders stood by for details of the latest round of US sanctions against Iran even as the latter dismissed the threat.

Brent crude was at about $93 a barrel on Monday.

The Weakest Monsoon in the last 20 Years

India is on course for its weakest monsoon in nearly two decades with rainfall likely to end the season around 15% below the long-term average, the lowest since 2019 according to weather department sources who spoke to Reuters. This could hurt crop output, drive up food prices and curb rural incomes.

Meanwhile the government has scrapped a years-long ban on the exports of wheat, a move that could ease global supplies that are under strain from escalating attacks between Russia and Ukraine according to Bloomberg report. The government has permitted exports of wheat including the durum variety as well as flour and other products according to notifications issued on Monday by the Directorate General of Foreign Trade or DGFT. In February the government had allowed limited shipments of the grain.

India is the world's second biggest wheat producer and its outbound wheat shipments could ease pressures in import dependent countries across Asia, Africa and West Asia according to Reuters report. The conflict had already sent Chicago wheat futures to a two-year high. India's last wheat harvest had hit an all-time high of 120 million tonnes.

The government had however prohibited wheat exports since 2022 and that's the same year Russia's invasion of Ukraine began citing food security concerns according to the Reuters report.

Are Index heavyweights past their glory years?

Now there is a lot of debate on the future of some of the index heavyweights which keep the index up or down depending on how you look at it. Some of the heavyweights are in areas like banking, consumer goods and information technology and you of course know of all of them.

Conceptually speaking is it possible that these heavyweights are now past their glory years? Now this is not a new theory and it is a fact that these three industries are quite different. So the question is what could be the uniting factor behind their subdued performance for so many years now and what could we take away from it? I caught up with Alok Agarwal, Deputy Chief Investment Officer of Alchemy Capital who speaks of what he calls a crossover theory in stock and company performance and I began by asking him to walk us through this.

INTERVIEW TRANSCRIPT

Alok Agarwal: Interestingly, we all have read and known that markets are a reflection of the economy, while a lot of parallels get drawn in the shorter term, but it really plays out over the longer term. One example I would like to take is, say for example, Indians have forever been savers, and the predominant way of saving was the savings accounts and dividends, and that was basically a low-cost raw material for the banking sector. Something that was less than 3-4% weightage in 2003, on the back of these low-cost deposits, went on to make a lot of profits, eventually going to nearly 40% of the index.

Times change, and the way the savers save, that has also started changing. We now see that the banks are really struggling for the growth and deposits, while the capital markets are attracting rising SIPs every now and then. So those changes get impacted, and those changes get reflected in the indices as well.

Coincidentally, the heavyweights in the main indices, the IT, the main consumption, FMCG, and the banking, they all started rising and started giving overall market-beating growth around the same time, say from 2003 till about COVID time, about 15-odd years, and this went on to really have a substantial share in the index as well. But as we often see sometimes in Bollywood and cricket as well, a lot of times the yesteryear stars, they come close to the retirement around the same time, and we started seeing that the earlier growth rates that we were used to in these sectors started fading away, and at a time when the broader market started giving much higher growth rates, and the focus on manufacturing, which was kind of neglected in the prior 15-odd years, they started making a comeback. So that's the great crossover we talk about, that it's not about the market cap breakdown, it's about the sectoral breakdown. The winners of yesterday and the winners of today and tomorrow could be very different.

Govindraj Ethiraj: So to pick on that, you talked about IT and banking, and clearly there are a couple of private banks, there are three or four big IT services companies. So you're saying that they all started growing at the same time, but these are very different industries. So what would be the reason for the fact that they've converged in terms of their fading away?

Alok Agarwal: Very difficult to point out. Each one of them have different matrices. You know, as banking I pointed out, in terms of consumption also, you know, there was a refined period between the GFC of 2008 till about the COVID of 2020.

That was a period where nominal GDP of India continued to go at 12-odd percent, but the corporate earnings were struggling to grow at 6-7 percent. During this time, there's IT and FMCG, which were not very, very high growth, but they were convincing double-digit growth, and which was almost double of the overall market growth. That's where, you know, a lot of index weight as well as market share started moving towards them in terms of the allocations as well.

But the same 10-odd percent is getting challenged because of external environments, and the overall economy is growing at a faster pace. The overall corporate earnings is growing at a faster pace. So their relative number is looking much worse than their own history.

So that's the reason, and the valuation expansion that happens because you have an industry-leading kind of a growth, that expansion gets challenged at a time when your growth rates are actually lagging the overall market growth. With a rising size, adding growth becomes that much more difficult, but I do think that it's more to do with the tailwinds in the sectors as well. The focus of the government has been more towards the manufacturing now, and rightly so, the power, the defence, and these sectors were virtually quite ignored during that time.

Let me give an example. From 2008 till 2020, a period where our nominal GDP must have grown over 3x, where I think the NICs must have grown at least 2x during that time, but the combined market cap of all the cyclicals just before the GFC and just before the COVID was almost the same. If I take 2007 end and say 2019 end, so all the cyclicals put together, the combined market cap virtually did not grow at a time when the economy has grown 3x, the NICs have grown 2x.

So that was a neglected time. We saw that services were actually contributing higher and higher share in our GDP, and we have been hearing from our prime ministers, where government efforts are being made to ensure that manufacturing starts contributing far more on the GDP side, and that's what we are noticing, especially on the power side and the defence side, and you look at the allocation in the budget as well, there's far more on the CAPEX side now.

Govindraj Ethiraj: Yeah, and as been for the last 5-6 years, we've seen massive CAPEX, and private sector has also pulled back in terms of its contribution to capital expansion. So we've talked about what you see in the rearview mirror, what do you see when you look ahead?

Alok Agarwal: So again, the domestic and the global factors play a big role. I think the most dominant factors, the two major factors globally today are the dominance and the expected dominance of AI and the whole value chain it brings with itself, and the second is the rising geopolitical tensions. So if you look at the AI side and the whole value chain, it starts with those with the IP rights, then comes the semiconductors and the memory chips.

These are the areas where India doesn't really have a very, very strong foothold. But then comes the whole infrastructure around that, that is required, especially on the electricity side, on the power side, the data centre side, and the whole supply chain around that. So right from the electrical transmission to the power equipments and to the natural resources and the base metals, each one of them feeds into it.

The demand is getting far more, I would say inelastic, it's not completely inelastic, getting more and more inelastic and everybody wants it far quickly, far quicker than actually can be produced. So that's an area of dominance globally. And second being the geopolitical tensions, that's where the defence expenditure for every country is likely to rise.

If you notice globally, we have around all the world put together, we spend around 2.5% of GDP on defence. We saw earlier this year and earlier last year also, like US almost withdrawing the security cover from Europe. As an outcome of the West Asia crisis, increasingly those countries are also realising how much they're paying for that cover, is it worth it?

And you recently heard that, you know, the drills in South Korea also getting curtailed. Each country has to fend for itself for defence. A 2.5% of GDP was a normalised one, where everything was quite secured, geopolitical tensions weren't rising. Historically, around the Cold War times, it used to be 6 odd percent of GDP. Our sense is we are heading that side. So a rising share of defence in the overall GDP of the world comes at a time when India's prowess in terms of producing things indigenously for our own requirements and for exports in some segments is rising.

So that's why it's a decade-long kind of a theme at least. I usually compare this almost like auto sector in the 90s, where from importing side, we started manufacturing. Earlier, the OEMs benefit and the ancillaries come in and we are still benefiting from that cycle.

So that's why it's a long, long cycle. These two are the major, major tailwinds globally and India fits into it for some parts of it. These are the major parts, I would say.

Housing without Jobs

India has spent heavily on housing schemes but are we building homes in the places where people actually need them? In the latest episode of how India's economy works which is part of the core, Puja Mehra spoke to economist Dr. Vidya Mahambare, Union Bank Chair Professor of Economics and Director Research and Fellow Programme in Management at the Great Lakes Institute of Management in Chennai about why India's housing policy could be rethought as part of a broader strategy for employment and economic growth. Mahambare argues that homes need to be built closer to where jobs are being created particularly in urban and semi-urban areas rather than simply subsidising home ownership in rural areas.

Here are some excerpts.

TRANSCRIPT

Vidya Mahambare: Maybe let's start way back in 2016 where when we started the Pradhan Mantri Awas Yojana in the rural areas under which we give subsidy to people to build homes if they have a plot of land in their native place. So what has happened over the years is perhaps by now we would have built something like 30 million houses approximately and we have spent a lot of money. It's a very popular scheme.

You know it's nice. It feels good to have your own house and it feels like a gift. But the problem is that we are creating as a country housing stock where the jobs are not there.

So we know the jobs are there in urban areas, they are in cities, they are in semi-urban areas, they are in towns and that's where really we need to build housing stock because houses need to be, homes need to be, residences need to be nearer to where people can work. So when you build homes in rural areas, yes family has got a house but eventually one person needs to migrate. That typically tends to be, it can be within the same state or outside the state but essentially typically man will migrate.

So the family is now left behind in their old house but nonetheless we are still splitting the families that way. Man comes to urban area and again lives in very crowded situation, not a very good housing. You already have severe shortage of housing in urban areas.

And then it adds to another problem in the sense that on one side and this is a completely different sector now we are talking about which is agriculture. So we have a problem in agriculture for a very long time where we say that our farmland is very fragmented and you know majority of India's farmers are small and marginal farmers and that means we need really land consolidation to improve land productivity and you know more mechanisation and all that. So typically how that happens is small plots of land get sold and land becomes bigger and the people really, because small plots are not really sustainable, you know small farms are very very difficult to make them sustainable.

So then those people leave out and do get into productive jobs and the rural land gets consolidated, big farms. But now that you have built a house on your own plot of land, now it's very very difficult that you will sell the plot. That means now that you have the asset, so asset is also stuck there because you cannot take the asset with you when you migrate, and now the land is also stuck.

So that way I feel it becomes more of a block again for land consolidation in rural area is also a block for family to migrate. You know we have for the same scheme we have the urban yojan also, urban housing scheme. But under that scheme what happened if I understand correctly in the beginning government built with the help of the private players, large housing complexes where they thought the relatively poor will come and occupy.

But then they figured out that the take-up rates are very low because these homes where they have built those buildings and not the location wise are not really the places conducive for people to commute in outskirts of cities and things like that, plus the infrastructure maintenance is not good in those places. So that means you created now in urban areas also housing somewhere, stock, but that is underutilised or unutilized to a large extent. The main thing is there is always trade-off right, so if you are spending so much money every rupee comes because something else can be done.

So if you have to improve housing, the thing is then what is the best policy. So people need home, maybe they don't need to own all the time and in the original 2015 policy if I remember there was a thing of giving rental vouchers to the people wherever they want. So essentially subsidise your rents.

So perhaps if we can relook at that policy instead of subsidising people directly to build homes, subsidise them to rent it where they want to. Of course if you give only the rental vouchers you create increase in demand for housing right, so that we increase the rents again. So that means you have to incentivise the supply side as well that more housing gets built also.

So it is both demand and supply has to be there and then that means we need to look at what are our policies in terms of how we create more affordable supply. So if you see city like India and now they have revised in last few years, but FSI and all has been very tightly controlled until a few years ago. So essentially we need to relook at I feel the overall housing policy, the intentions may have been very good that every family should have a house, but where should we build the housing stock is the basic issue.

Puja Mehra: Vidya, will addressing the housing requirements in urban areas by the non-prosperous states help bridge their development gaps with the prosperous states. We increasingly see this discourse about the huge and deep gap between the northern and southern states because a lot of labour migrates from northern states to the southern states. Do you think if the northern states could supply more housing in urban areas where job opportunities are likely to be, then they could also catch up somewhat with the southern states on development and growth?

Vidya Mahambare: So the housing is only one factor and housing is required when there are jobs or at least when there is expectation of jobs that will come up. So then only people will migrate to take up the job and then they need a house. Then before that the question is essentially how do you create jobs?

That is the main question. When you have jobs, then only you require a house near to it. So the less prosperous states essentially have to think about the job creation first and what kind of jobs they want to create.

So for example, if you see now for a minute, if you go back to the prosperous states, prosperous states, the labour has got now, if you see people in twenties, more than half of them are in higher education. So automatically, as we said, they look for service sector jobs or if not service sector, they have to be like high end manufacturing kind of a thing, which is electronics and things like that, because, you know, there is a status involved in that. Status becomes very important once you get more educated.

Puja Mehra: Education levels have changed, their aspiration levels is what you're saying. They're not satisfied anymore with low end manufacturing jobs.

Vidya Mahambare: Correct. They are not satisfied with the low end manufacturing. One aspiration level rises.

Simply, you know, if you think of sector such as textile, these factories are quite noisy. There is a lot of heat. So it's not easy to work.

Right. So you automatically aspire to work in a better work environment, which you can get at least in something like electronics, because these factories are also AC kind of factory or in service sector. So in prosperous states, automatically the economy will move towards that.

Then if you come to the non-prosperous states, how should the industrial or the manufacturing, where will you have jobs? So typically, unfortunately, our non-prosperous states too early have gone into all sorts of services, low end services. Right.

So even Bihar economy and all is dominated by services, but that is a really low value at services. Compared to that, if they're able to do manufacturing, because education levels may be still, you know, relatively less and there are no other kind of jobs, people will still may be willing to work in the manufacturing sector. But only housing is not housing is afterwards, once you have the jobs.

So how do you create jobs means, you know, institutions have to be right. Right. What we talked about, all other things that are required for manufacturing.

You need infrastructure. For example, if you take UP, which is a landlocked state, you do not naturally have a port. So we are trying to do something about it via the rivers and so.

But then you have to be much more efficient in everything else. Right. Your cost of production has to be lower elsewhere to take on the extra transportation costs.

So how do you facilitate all other factors so that the manufacturing companies are willing to either relocate or willing to open in Northern Belt? That is the first question. And once they're beginning to happen, then you ensure that there is a sufficient housing that will come up where the jobs are.

It's all interlinked. I wouldn't say that, you know, just if we solve the housing or create the housing first and then jobs will come, that will not happen unless everything else is conducive for an entrepreneur.

Puja Mehra: I get it. So your argument more is that you'll get better bang for the buck on the housing subsidies that are spent if the location of where these housing is created is given greater thought.

Vidya Mahambare: Yes. So if we think about now how the housing policies may play a role for prosperous as well, but even non-prosperous days is, for example, if you take Foxconn, when they came to Tamil Nadu, one of their requirements was that they wanted to employ some 18 or 20,000 people. Now this generally has not happened in India.

You know, you are initially small and then you expat. That's normally the route. Now if an MNC is coming, who to start off itself, you know, wants to create or need a labour which is 18-20,000, now they need a housing for these people to stay.

Right. What happened in China, essentially, you know, massive industrial housing. Now how do you create that?

Because the company essentially says we are not going to take that fixed cost, right? Because it's a very high fixed cost for them. And if it doesn't work out, then, you know, their capital is stuck.

So that is also where the government can play a role. One can build this industrial housing such that it need not be company specific. Tomorrow that company goes, some other company can come there.

But you have built a large industrial housing. Such kind of support previously has not been. Previously Indian manufacturing companies, essentially, they have built their own hostels in their premises.

Okay. But increasingly, given that, because they used to own that land, right? It's most of the time in the beginning, it is like family owned manufacturing companies and so on.

And you had the land and you built. But now doing that is increasingly very, very expensive. So that becomes a big deterrent.

So if you want a massive scale of job creation in manufacturing and large companies who will create like not like few hundred jobs, but few thousand jobs at one time, then government will somewhere have to play a role in figuring out how to facilitate industrial. And that is true for the non-prosperous state as well. This problem will come up there as well, not only for the prosperous states.

Aviation Industry in India Contracts

India's aviation industry is going through a rough patch once again perhaps this time because of lower demand high fares and reduced capacity to match not necessarily in that order. Domestic passenger traffic is slowing even as airlines have slashed flights held fares at higher levels and also holding load factors at around 85 percent according to a report in the Mint newspaper.

Domestic departures in July fell to about 82,250 from 89,000 in July 2025 and 92,000 in July 2024 so that clearly being the month and year we saw the last peak. So at current levels that's July 2026 we're almost 11 percent below the 2024 peak and 8 percent below last year or 10,000 fewer flights than in 2024. Director General of Civil Aviation data quoted by the Mint shows July departures were down 38 percent for SpiceJet, 19 percent for Air India, 18 percent for Air India Express, 7 percent for Akasa Air and 3 percent at Indigo from a year earlier.

Meanwhile average airfares across 72 domestic sectors were up 20 percent between March last year and June this year according to the DGCA's data cited by the Civil Aviation Ministry in a written reply to the Upper House of Parliament Rajya Sabha on the 27th of July. Domestic passenger traffic has also lost momentum it grew just 0.6 percent year-on-year in Jan to July this year the slowest in five years in July traffic fell about five percent from a year earlier. The Mint report says that average ticket prices are now hovering in the seven to seven thousand five hundred rupee range roughly compared to about five to five thousand five hundred rupees a year earlier.

Airlines have broadly cited operational constraints higher jet fuel prices and longer flying hours because of airspace restrictions over Pakistan that's for international flights and continued turmoil in West Asia among other factors for capacity adjustments according to the Mint report. Meanwhile in a positive industry note Bloomberg is reporting that GMR Airports is planning to spend about two billion dollars or 19,000 crore rupees to expand its New Delhi and Hyderabad airports. The investments spread over the next five to seven years are aimed at expanding capacity and modernising infrastructure the company's executive director of finance told Bloomberg.

India is the world's third largest domestic aviation market behind the United States and China. Flyer traffic is expected to grow six times to about one billion passengers over the next 14 years while commercial airline fleets are expected to go from 400 planes in 2014 to more than 2,530 by 2040 according to government estimates.