Inside India

An India macro update

State elections boost Modi’s chances for next year.

Some lingering uncertainty about the Indian economy concerns next year’s general election. Will Narendra Modi renew the current majority to continue the policies implemented in recent years? Or will a turn in the voters’ opinions create a more complicated political situation that might slow down growth? The recent elections in a handful of states (Telangana, Madhya Pradesh, Rajasthan, etc) were seen as a test on Modi’s chances. Modi’s party, BJP, took majorities in Rajasthan, Madhya Pradhesh and Chhattisgarh, the first two particularly important in population and political weight. This has been hailed as a sign that next year election is likely going BJP’s way, which would mean a very rare third 5-year term for Prime Minister Modi.

Q2 GDP growth above expectations

In the second quarter of the fiscal year, India’s GDP growth beat all expectations, clocking at 7.6%, way above the previously forecasted 6.7%. Strong growth in manufacturing, construction and investment was mainly responsible for this result, while private consumption stayed far below, indicating a growth driven by government and private infrastructure investments and perhaps the incentives given to manufacturing under the “Make in India” program. Again, India’s GDP is quite dependent on exports and thus on how the world’s economies evolve but the results of the first two quarters suggest that another year above 6% GDP growth is most likely. (Image source: Economic Times)

Stock indices at historical highs and IPO frenzy continues

Earlier this year in March, the Nifty50 (one of the two main stock exchange general indices) was moving around the 16,900-point mark. This week, it is caressing 21,000 (an all-time high), which means a jump of almost 25% in value in just 8 months. Many good news have fueled this booming growth, including the above mentioned political and economic developments. This, together with the middling performance of stock markets in U.S., China and Europe, has also increased the flux of foreign capital coming into Indian stocks. Many analysts look at next year as a continuation of these trends, with the Nifty50 perhaps reaching above 23,000. It is indeed an incredible period to invest in Indian stocks across the board.


One type of stocks in particular has captured the attention of Indian non-institutional or retail investors and that is start-ups launching an IPO. In recent years, a good number of well-known successful startups (Zomato, Paytm, Nykaa, etc.) have become public, with retail demand of shares usually many times above the available number. Just a few days ago, Tata Technologies, a unit of Tata Motors that provides engineering and technology services to a variety of sectors, became a public company, with an IPO that attracted 62 times more demand of shares than the ones allocated for individual investors. Those lucky enough to get an allotment, saw their investment balloon 180% in value in just the first day of trading. That is why IPOs in India are getting a lot of love these days and why the water-cooler talks in offices around the country now regularly include questions like “Are you going for this company’s IPO?” or “Did you get any allotment of shares in last week’s IPO?”

Hiring slows down overall but growth is shifting to Tier 2 cities

In contrast to the strong growth numbers, hiring activity has slowed down a bit across the country. Some estimates put hiring in the recent month of November about 10% below the figure in the same month last year and about 2% lower than in the previous month (Economic Times, December 5). To understand the reasons for this slowdown, one has to take into account that India’s economy is quite tilted towards services (53% of the total GDP) and that many of these services are exports, which makes the economy in general and hiring in particular fairly exposed to slow-downs in other parts of the world, especially the U.S. and Europe. For instance, IT services represent more than 7% of the total GDP and about 80% of those IT revenues are obtained outside India. Consulting is another industry heavily driven by business done outside India and, just this week, a report came out about the recent drop in recruitment by the big consulting firms in top business schools. But while a few industries might be pulling down overall hiring, other sectors are experiencing an upwards trend. For instance, public sector and defence showed an increase of 14% relative to the previous month and other sectors like retail and pharma are also up. So it seems more a localized issue rather than a general one.


But perhaps the most interesting trend is that while Tier-1 cities like Mumbai, Kolkata and Pune experienced declines in hiring, Tier-2 cities like Coimbatore, Kochi and Jaipur showed a significant increase. This is another piece of evidence of a larger phenomenon happening right now in India. In previous years, the largest cities in the country were almost exclusively responsible for economic growth. But that seems to be changing, with many smaller urban centers becoming very relevant economic engines.