Despite the reduction in corporate tax and low interest rate regimes making loans very cheap, recently there has been a hype that the Indian economy is stable despite the global trends that show sluggish growth, but the hype may be misstated. However, to get to grips with the real time state of the Indian economy it would be prudent to examine the performance of stock market viz a viz the actual valuations, the performance of the mutual funds and the health of the Indian banks especially the PSBs which have been weighed by the heavy burden of high non-performing assets (NPAs).
To start with it may be argued that despite the Sensex and the Nifty being at an all-time high levels, valuation of most of the stocks among the blue chips have not been positive barring most of the multi-national companies and a handful of private Indian companies. The performance of the mid-caps and the small caps have been unsatisfactory which has resulted in net asset values (NAVs) of mutual funds having declined to fairly low levels out of sync with the high Sensed and Nifty values. Considering that top-end mutual funds would even accrue one year returns of 50% when the Sensex was 36,000 points, at this point in time, most of the top mutual funds do not even give yearly returns of 25% which is half of what was the trend a few years back considering that the Sensex has skyrocketed to 41,000 points from the 36,000 points then, but this only indicates inflated market with valuations actually taking a dip.
To be fair, a few front line blue chips both in the large caps and the mid-caps have maintained robust balance sheets. Now, comes the economic health of the PSBs (public sector banks). In August, 2012, all the PSBs were accruing profits with comparatively very high market values and earnings per share, but extremely low price to earning rations (P/Es). Later in October 2016 all PSBs except two were showing profitability. In 2012 and 2015 even the associate banks of the prime lender were showing robust balance sheets. In April 2019, 10 of the 12 PSBs whose figures were available in top Indian business dailies were in losses and only two profited. In December, 2019, 4 out of seven PSBs were showing profit which were, however, having very low earnings per share.
It may be argued that in the last 3 years due to low interest rates on fixed deposits, most of the investors opted for mutual funds and closed their fixed deposit accounts. Though at present PSBs seem to show profitability in a narrow range, still after merging of PSBs, the quantum of money in the banks have reduced considerably due to very high NPAs which even reached a peak for some PSBs to 20% as also the fact that depositors parked their money in mutual funds. Comparatively the private banks performed better.
In the light of the above trends, it would be wrong to assume that the economy is on solid footing. Lots have to be done to bring the economy on to a level that entailed a growth rate of 8% as was seen in the past. The economy needs a high degree of compaction and solidification. Higher levels of the indices need not necessarily reflect the robust health of the Indian economy.
