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Will slowing consumption lead to a fall in stock prices?

The retail inflation for June 2021 stood at 6.26%, slightly lower than 6.3% in May 2021. High retail inflation hurts consumption, especially in an environment where income growth has been slow (Photo: Mint)Premium
The retail inflation for June 2021 stood at 6.26%, slightly lower than 6.3% in May 2021. High retail inflation hurts consumption, especially in an environment where income growth has been slow (Photo: Mint)

Given that private consumption makes for nearly three-fifths of the entire economy, this should have impacted businesses and their earnings. While this has impacted small businesses, the same cannot be said about large-listed corporates, whose earnings have gone from strength to strength

The stock market has been rather subdued over the last month, with the BSE Sensex, India’s premier stock market index, moving within a limited range of 52,000-53,000 points. What’s happening here? A whole host of private consumption indicators haven’t looked good lately. The question is, will this slowdown in consumption impact stock prices.

Let’s look at this pointwise.

1) The retail inflation for June 2021 stood at 6.26%, slightly lower than 6.3% in May 2021. High retail inflation hurts consumption, especially in an environment where income growth has been slow.

2) Inflation has been driven by the massive rise in oil prices. In June 2021, the average price of Indian crude oil was at $78.85 per barrel, almost double the average price of $40.63 per barrel in June 2020. Petrol prices have crossed 100 per litre in many parts of the country. Diesel prices have also risen by leaps and bounds, in the process pushing up prices of goods that need to be moved from the place they are produced to the place they are consumed.

3) Consumer confidence is at its lowest level ever. The RBI’s current situation index and the future expectations index were both at their lowest ever levels in May 2021. As the RBI said in a release: “Household spending also weakened in the latest survey round, with essential spending showing signs of moderation while non-essential spending continues to contract."

4) This lack of consumer confidence is also seen in banking data. Non-food credit as of 18 June, the latest data available, stood at 107.55 trillion. It has contracted by 1.2% since 26 March. Hence, on the whole, banks haven’t given any fresh credit during this financial year.

This trend is visible even when it comes to banks’ retail loans. Retail loans as of March-end stood at 28.14 trillion, and by the end of May, they had contracted a little to 27.87 trillion, showing a lack of consumer confidence in taking on new loans.

5) While retail loans, on the whole, have shrunk, bank loans against gold jewellery between January 2021 and May 2021 have gone up by 44% to 62,101 crore. This is a clear indicator of households getting into financial emergencies and using gold jewellery to borrow money to get over the difficult period. People in India pledge gold only when they run out of all other resources.

As this news report warns, there is a “deepening distress among the public due to the pandemic" and “that banks are headed to an NPA crisis from September quarter when gold loans with one-year tenure mature."

So people have been mortgaging gold jewellery and are getting into a financial situation where they will be unable to repay the debt taken on.

6) According to the Centre for Monitoring Indian Economy, the proportion of urban households that said their incomes have worsened in June compared to last year stood at 52.3%. This was at 51.4% in May. When it came to buying consumer durables, 61.2% of the households felt it was a worse time, in comparison to 55% in May.

7) In May 2021, the auto-debit payment bounces from bank accounts went up to 35.91% against 34.05% in April. This tells us that many people did not have enough money to make payments for EMIs, insurance premiums or SIPs or electricity bills, telephone bills, etc. These payments are scheduled in advance.

8) The total number of employed Indians as of June stood at 383.3 million. This had stood at 410.4 million as of January 2020, before the covid pandemic started. What this means is that many jobs that existed before covid have been destroyed. The total number of employed individuals between January 2020 and June 2021 came down by 6.6%. Again, this impacts the consuming power of India as a whole.

These factors clearly show us that the average Indian is struggling on the income and consumption front. Given that private consumption makes for nearly three-fifths of the entire economy, this should have impacted businesses and their earnings. While this has impacted small businesses, the same cannot be said about large-listed corporates, whose earnings have gone from strength to strength. In fact, between the end of June 2020 and the end of March 2021, the listed companies made record profits.

This has largely happened due to cost control. Companies have renegotiated contracts with their suppliers and contractors and, in the process, pushed up their profits. But ultimately, profits can only grow if sales grow. And for that to happen, people need to consume. That’s the clear link between the state of the economy and the state of the stock market.

This link has broken down over the last few years with stock prices running up at a much faster pace than company earnings. Plus, the world is flush with money looking to earn returns.

This is reflected in the recent initial public offering (IPO) of Clean Science and Technology Ltd. The company had planned to raise 1,546.62 crore through an IPO. It was oversubscribed 93.41 times. This means that more than 1 lakh crore is chasing this IPO.

It tells us clearly that there is a lot of money chasing returns. There are investors out there who are unhappy with negative real returns on fixed deposits and happy to take on the risk of investing in an IPO. This also tells us that banks and non-banking finance companies (NBFCs) aren’t able to lend money and are happy to finance IPO purchases. The non-institutional part of the Clean Science IPO was oversubscribed 206.4 times. This includes the high-net-worth individuals as well.

In this scenario, where too much money is chasing the same set of stocks, there is bound to be some price inflation when it comes to stocks. At the same time, consumption and consumers are not in a good state. Given that the stock market discounts for possibilities, this should have impacted stock prices as well. But as John Maynard Keynes once supposedly said: “markets can remain irrational longer than you can remain solvent." That’s the long and the short of it.

Vivek Kaul is the author of Bad Money.

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