Sobering signals that Indian stock markets may be ignoring in this euphoria

• While the market seems to be focusing on the brighter side, here are some triggers impacting the economy and markets that need to be noted.
• From expectation of low monsoon to decline in auto sales there are various factors indicating a slowdown.
• Meanwhile, Indian stock markets are continuing to hit record highs with growing liquidity in the market.

While the market participants seem to be enjoying the euphoria of frequent record highs, there are some concerning triggers to be noted. While data has shown a better-than-expected recovery in the April-June quarter, the economy is not back to the level it was before the pandemic.

Between agriculture and automobile manufacturing, nearly two-fifth of the country’s economy is in doldrums. But the Nifty is still hovering around its record high that it hit on August 31.

Here are some of the triggers to take notice:

Monsoon deficit
Poor rains in August have widened the monsoon deficit in the country. The India Meteorological Department (IMD) has indicated that the overall monsoon is likely to be at the ‘lower end of the normal’ in the country.

Weak monsoons have a cascading effect on the agriculture segment, which makes for 20% of India’s gross domestic product (GDP) and supports the livelihood for more than 100 million people, directly or indirectly, according to NABARD All India Rural Financial Inclusion Survey 2016-17.

The impact of less-than-expected rains reflected in the decline in tractor sales of some of the manufacturers like Mahindra & Mahindra and Escorts in August compared to the month before it.

Tractor sales in some of these auto makers dipped in August.

Broking firm CLSA reportedly expects a month-on-month decline of 18% for tractors in Q2.

A report by JM Financial indicates that these slowing trends may revert soon. “The irregular pattern of rainfall in July-Aug 2021 however impacted agri-related investments including tractor sales but the overall growth trend is likely to revert back, as our checks suggest,” said the report.

Declining auto sales
Auto sales in August 2021 saw a month-on-month decline in volumes across most segments as automobile makers cut production amid a worsening global chip shortage. Auto companies’ growth counts in a major way as it contributes 7.1% to the country’s GDP.

Analysts expect the slowdown in vehicle sales to continue in coming months as auto part manufacturers face semiconductor shortages. The COVID-19 pandemic has reportedly driven up demand for semiconductor chips that are used in cars and computers and so on.


“Semiconductor availability remains a challenge for most original equipment manufacturers (OEMs) and will lead to a demand-supply mismatch in the upcoming festive season as channel inventory is already below normal,” said a report by BOB Capital Markets.

Analysts at broking firm CLSA reportedly see further month-on-month decline for passenger vehicles, commercial vehicles and tractors.

Fall in government spending
Government spending that supported GDP growth since the start of the pandemic has started to come down. Government expenditure declined 4.8% in the June quarter of 2021. “Government spend this year would likely be in the form of transfer/subsidies payments, with no material contribution to GDP,” said Madhavi Arora, Lead Economist, Emkay Global.

Weak consumer demand
The Reserve Bank of India (RBI) data for August shows that the consumer confidence remained weak and at an all-time low due to lower incomes and higher level of price.

“Driven by substantial improvements in the outlook for general economic situation and employment scenario after the waning of the second wave of the COVID-19 pandemic, the future expectations index (FEI) returned to optimistic territory; respondents placed higher confidence on household income going forward,” said RBI’s consumer confidence survey.

Signs of rising COVID-19 cases
Rising COVID cases is another risk haunting the economy with fear of an imminent third wave.

On September 2, India reported 47,092 new infections, the biggest single-day rise in two months. About 509 deaths were recorded during the past 24 hours, according to the Health Ministry.

Moreover, resurgence of infections in countries like the US are seens as signs of another wave for other countries.

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