Diwali marks the start of a new fiscal in the traditional calendar. Most businesses will symbolically open new account books. There are plenty of other customs with financial associations. For example, people will gamble. Investors will make at least one ritual trade on Diwali. Employees are handed bonuses, consumer-oriented businesses offer large discounts. People splurge on holidays.
The effects on both the real economy and the financial economy are interesting. In fact, one problem in de-seasonalising Indian economic data is the shifting nature of Diwali, Id and other festivals that affect consumption.
Where the real economy is concerned, Diwali and the period around it is the key shopping season. Big ticket consumer items like cars, bikes, fridges, microwaves, mobile phones and white goods are bought in large numbers.
The effect on the financial economy is more complicated. The demand for consumer credit and by extension, for working capital rises during this period. But there is often a negative effect on equity markets. Some investors go on holiday and others are more interested in consumption.
Diwali does have the potential to kickstart consumption and it could thus mark a revival in domestic growth. The possibility appears small since most 2013-14 GDP and corporate earnings projections don't see much change in the second half of this fiscal. But it is a possibility.
Even if Diwali fervour provides a consumption burst and helps to push up growth rates a little, the market would still look over-valued at current levels. The current interest rates and yields justify PE discounts of 14-15 at best and the Nifty is already at above 18PE. Betting on a sustained bounce in earning growth over the second half could be optimistic.
One thing that Q2 results indicate is that agriculture-related businesses have done well. Companies like Escorts, Rallis, United Phosphorus, etc., have improved earnings growth. This backs up assertions that agriculture is likely to deliver a fairly decent growth performance this year.
If this is the case, rural consumption post-harvest is likely to be reasonably good. Marketers are expecting that to translate into better sales for companies that can service rural demand. Apart from the usual clutch of FMCGs, this could mean better performances in terms of auto sales and maybe, for white goods as well. Assuming the mess in telecom policy is sorted out, there could also be rural rollouts and quality upgrades with new products and service offerings.
Servicing rural and semi-urban markets is different from servicing larger towns. The local physical infrastructure is less robust and building distribution channels can be a very painful process. Financing and banking logistics are all the more challenging. Demand patterns also tend to be somewhat different. For example, rural vehicle buying is focussed on different needs. More gensets, pumps, etc., also tend to be sold in rural markets. So this will be where domestic consumption driven businesses look for growth in the second half.
I don't know if there is sufficient momentum in agricultural growth to fuel a revival across the wider economy. The numbers are daunting. While over 60 per cent of Indians live in rural areas, a lower percentage actually earn their primary income from agriculture. The sector in itself accounts for just 15 per cent or so of the GDP. What is more, even at its fastest growth rates, it tends to slow growth in absolute terms.
It is expecting a lot for it to boost growth across the other 85 per cent of GDP.
Cynically speaking, this may not matter. Agro-driven growth could be the next investment story even if it doesn't hold up to close scrutiny. So business with a link to that story could receive speculative investment that drives up share prices, even if such a bull run seems unjustified.
Right now, there's excess liquidity in the system and a "catch-up" mentality prevails among a certain class of domestic investors with deep pockets. The FIIs have pushed up share prices but few Indians have participated in that rally. Some of them are desperate to catch up and score quick gains and looking for post-Diwali punts. The agro sector and the rural story are among the places they could go.
We could see a situation where FIIs start booking profits and domestic institutions remain cautious while retail comes in at higher levels. Some version of that is in fact, the classic scenario at a market top - institution goes out and retail comes in.
Having stayed out at Nifty 5500 levels, it makes little apparent sense to come in at Nifty 6300 since the fundamentals haven't really changed while shares became more expensive. But logic tends to go out of the window when share prices are climbing and I won't be surprised if this happens.
