3 key takeaways from Netra, July 2023

Welcome to the July 2023 edition of Netra, where we explore key insights shaping India's economic outlook. In this edition, we delve into India's external balance, the potential impact of El Niño on the economy, and the sustainability of Indian stocks at record highs. Our analysis aims to provide valuable knowledge and a deeper understanding of India's economic trajectory.

India's external balance has long been a concern, but recent data offers hope for a positive shift. We examine the robust growth in services net exports and remittances, showcasing India's prowess in high-value services. Additionally, we explore the shrinking oil trade deficit and its potential impact on balancing India's external accounts.

The potential impact of El Niño on India's economy is another area of focus. We assess recent developments and the severity of the upcoming El Niño event, considering India's agricultural resilience and measures taken to mitigate the economic consequences of droughts.

Lastly, we analyze the sustainability of Indian stocks at their record highs. By examining market breadth and the participation of advancing stocks, we gain insights into the health and sustainability of the Indian stock market.

Is India’s external balance paving a path to positivity?

India's external balance has long been a cause for concern, with factors like oil trade deficits and merchandise trade imbalances contributing to a precarious situation. However, recent data offers a glimmer of hope.

India's services net exports and remittances have exhibited robust growth, with a 6% Compound Annual Growth Rate (CAGR) in US Dollar terms. This showcases India's prowess in high-value services and the significance of remittances from abroad.

The chronic oil trade deficit is gradually shrinking in proportion to the rising GDP. Previously, when oil prices surpassed $100 per barrel, India's oil trade deficit would surge to account for 50% of the merchandise trade deficit. However, recent developments indicate a positive shift in the balance.

Even with oil prices at $100, remittances alone have the potential to balance India's oil deficit, showcasing their growing strength in stabilizing the external balance.

To propel India's current account towards a surplus, a crude oil price point of $60 or lower, coupled with a steady 5% CAGR growth in services exports, is crucial. Additionally, a surge in electronic goods exports from $24 billion in FY23 to $40 billion within the next five years would play a vital role in balancing the external accounts.

The El Niño Alert and the potential impact on India's economy

El Niño, characterized by abnormal ocean surface warming in the equatorial Pacific, has historically caused varying severity of droughts in India. However, recent developments suggest a less severe impact of the upcoming El Niño event.

India has made remarkable strides in agricultural development and resilience over the past decades. With over 50% of cultivated land having access to irrigation, India has reduced its reliance on rainfall.

Strategic storage buffers, widespread adoption of drip irrigation, and improved supply chain management have minimized the economic repercussions of droughts.

While El Niño affects India's agricultural GDP more than inflation, its influence on inflation has weakened over time. Since 1991, India has not experienced a strong El Niño impact, indicating a less disruptive effect on the economy.

If the intensity of the El Niño event remains weak, the risks to inflation and overall growth in India will be minimal. However, an intensified El Niño could potentially result in slower economic growth, depending on its severity and duration.

How sustainable are the record highs of Indian stocks?

Indian stocks have been surging to new heights, reaching record highs in recent times. The overall health of the market is determined by market breadth, which measures the number of advancing stocks compared to declining stocks. When there is a significant imbalance in favor of advancing stocks, it indicates broad participation and reflects a robust market trend.

Historically, the NSE 500, a broad representation of the Indian stock market, has sustained new highs when at least 15% of its member stocks make new 52-week highs. This threshold should be met within two weeks of the index reaching a new life high. These statistics provide valuable insights into market breadth and sustainability.

Recent observations show a positive trend in market breadth over the last week. An increasing number of stocks making new 52-week highs signifies broad-based participation and reinforces the notion of a healthy market.

The data points highlight the sustained upward trajectory of Indian stocks, with market breadth indicating a strong market trend supported by broad participation.

The Bottom Line

India's economic landscape is undergoing transformative changes, offering hope for a more stable and prosperous future. Robust growth in services net exports and remittances, coupled with a diminishing oil trade deficit, signals the potential for a positive external balance. The impact of El Niño on India's economy appears to be less severe, thanks to increased irrigation coverage and improved resilience. Additionally, the sustainability of Indian stocks at record highs is supported by positive market breadth.

Apart from these, July 2023 edition of Netra offers several other key insights into India’s economic outlook. You can download the full report here.