Systematix Institutional Equities recently shared a report summarizing key takeaways from their discussion with Professor Viral Acharya.
Here are some interesting points from the discussion.
Although the stock market is still in good weather, it is out of sync with the real economy. India’s GDP growth is 5-7% below its pre-coronavirus trend. So the divergence essentially reflects a sharp slowdown in the smaller, informal, and unlisted sectors of the economy, while large companies are profitable.
The employment situation remains sluggish, indicating that a K-shaped recovery is progressing.
If large parts of the economy fail to grow real wages, the economy’s consumption engine will eventually slow down. Credit can sustain the growth of the consumption engine for some time, but it will become a problem if real incomes do not rise.
- The difference in profit to turnover between large companies and SMEs varies greatly. Large companies have profited at the expense of smaller companies through acquisitions and the resulting expansion of market power.
Thus, private capital investment remains elusive, even though the cleanup has improved the stability of the banking sector.
High corporate profits are driving deleveraging, not investment. Large companies have created margins and increased profits by constraining supply and charging high prices, not by improving efficiency. This may be good for the stock market, but bad for the real economy.
- Backdoor privatization is not the whole solution, as further privatizations are concentrated only in chosen names.
A potential solution to this elusive private investment conundrum may be to make the economy more dynamic and competitive.
The real challenge in question is that India is not creating jobs fast enough for young people to enter the workforce.
Agriculture’s share of employment is still fairly high (NSS 46.5%, 2020-21), contributing only 18% to GDP. Subsidies are concentrated in this sector as well.
Relying heavily on the agricultural sector for job creation is undesirable. The government should seriously reconsider this whole function to bring agriculture to a level where it cannot be heavily subsidized.
A number of indicators suggest a macro policy review is needed. A possible solution could be found in strengthening our capabilities and investments in our services sector. The Indian services sector (both tech and non-tech) does not have high entry barriers unlike other countries.
This is because the employment elasticity of the service sector is also very high compared to other sectors, especially manufacturing. This could be one of the means to help create jobs for the growing workforce. India has far more vocational training potential and expertise and we need to continue to capitalize on this to enhance the capabilities of our workforce.
In the past, one way the United States created low inflation was by moving manufacturing to other parts of the world. But with labor costs soaring, rebuilding manufacturing capacity will be difficult. It will be a step-by-step process.
America can dominate in innovation, robotics, and AI. However, it is very difficult to compete with Asia in terms of labor. Near-shoring and reshoring, therefore, may still not be a major driver for the United States in the short term. Here is a structural tailwind for her IT industry in India.
There seems to be a pattern in the recent banking crisis. Signature Banks, Silicon Valley Banks, and First Republic Banks were all heavily impacted by the cryptocurrency, technology, and commercial and real estate sectors, which saw significant adjustments as a result of the Fed’s first phase of normalization. was
The ongoing credit crunch at the regional bank level is expected to accelerate further, with consequent impacts on small and medium-sized businesses that are highly dependent on regional banks (50%). Depositors shy away from lazy banks that rely more on interest rate arbitrage for margins and revenue than on bank lending operations, which will intensify the consolidation process.
The bank collapse episodes we are witnessing seem to be characterized by a permanent outflow of funds from smaller banks to money market funds and larger banks, thereby exacerbating the monopolistic nature of the larger banks. Expanding.
A scenario in which local banks and medium-sized banks continue to fail could lead to the spread of infection. Here, the Fed’s prerogative of supporting a soft-landing scenario is challenged, forcing the Fed to cut rates and inject liquidity even as inflation remains persistently elevated and tenacious. This coercive situation will backfire on previous efforts to curb inflation, as currently strong consumer demand is re-stimulated.
Therefore, rather than focusing solely on the Fed’s efforts, attention should be paid to the performance of regional banks.