As the growth momentum in the Indian economy was picking up pace, the uncertainty and potential disruption due to the Omicron variant has dampened the optimism. All macro-indicators are showcasing signs of an economy with strong tailwinds - GDP growth at 8.4% in Q2 FY22 was in line with estimates for a 9.5-10% GDP growth for FY22 (potentially the fastest growing economy in the world and most importantly back to pre-Covid levels in absolute terms). High frequency indicators (e-way bills, power consumption, employment) indicate that the momentum in economic growth may continue well into CY22. Services and the rural economy continue to spearhead economic growth although scars of the pandemic (job losses and income compression) continue to take a toll on private consumption (PFCE for H1 FY22 higher by 13.5% YoY is still below its 2020 levels). This impairs private investment as capacity utilization in most sectors is still sub-optimal. In the short-term, demand will continue to be driven by public expenditure (primarily Central govt expenditure which is up 11% YoY largely driven by infrastructure spending). Growth in merchandise and services exports (estimated at USD 400 bn and USD 150 bn for FY22 ) is likely to add impetus to economic growth. Buoyant tax collections (direct and indirect tax collections are up 40%/41% YoY) will minimize the likely slippage (~0.3-0.5%) to the budgeted fiscal deficit. Key risks to the economy emanate from Omicron disrupting the global economy (lockdowns, trade disruptions) and impacting the manufacturing and services sector in India. The combined impact of the hawkish Fed taper, sticky inflation and continued high commodity prices is being reflected in the weakness in the currency and the public markets.
Notwithstanding the above, structurally, India is poised to reap the benefit of multiple growth levers. The banking system is stronger than it has been in the past and there is abundance of credit availability at very low rates. A bullish commodity cycle has led to significant corporate deleveraging thereby enhancing credit worthiness and expanding incremental borrowing capacity. Operating efficiencies realized during the Covid period, benign interest rates, increasing digitalization and a revival of consumer demand has manifested itself in record earnings growth -- a trend that is likely to accelerate in the coming few years at a faster pace than historical earnings growth. Public market valuations (Nifty PE @18-19x FY23E EPS), despite the late December correction, seem to be reflecting this paradigm shift. Domestic institutions/investors continue to be the primary drivers of the markets with muted FII/FPI participation. Financing activity continues to be very strong specially in the private markets (~USD 75 bn YTD) which are overshadowing capital market raises (~USD 15 bn).
The success of recently listed consumer technology businesses like Nykaa and Policybazaar clearly indicates a strong and continuing investor appetite in the public market ecosystem for well managed tech companies. Despite the moderating of tech valuations in the US (especially the non-FAANG universe), Indian tech businesses continue command premium valuations. Few segments like D2C brands, fintech and SaaS continue to demonstrate very attractive growth metrics and hence continue to attract significant investor interest.