Was Friday's 1,200 Point Rally More Emotional than Rational?

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India's third quarter GDP numbers are out, and they make for a great reading. At least at first glance.

By growing at 8.4% in the December quarter, the Indian economy has left the economic community pleasantly surprised.

In fact, this is the first time in six quarters that the growth of this magnitude has been recorded. No wonder, the markets are ecstatic.

It is amazing how sentiments change. The SEBI warning from a few days ago, has been almost forgotten. The focus has now shifted to the impact of the stellar GDP growth on corporate earnings and consequently, the stock market.

However, those who've read the fine print aren't convinced that the stock market should rally so much. They are dismissing the GDP growth as one-time in nature and expect it to revert to the trendline shortly.

You see, there seems to be a divergence between the GDP growth and the growth in GVA (Gross Value Added). While GDP has grown by 8.4% in 3QFY24, the growth in GVA is a lot lower at 6.5%.

Now, GVA helps calculate the economic performance from the supply side of things. To put it simply, GVA is GDP excluding indirect taxes and subsidies.

This means that the growth in net taxes of an impressive 32% has played a big role in the GDP growth of 8.4% coming in significantly higher than GVA growth of 6.5%.

Hence, with taxes not expected to grow at such a high rate going forward, GDP growth should also slow down and get more in line with the GVA growth. In other words, the high GDP growth of 8.4% doesn't appear sustainable and is more one time in nature.

There are also a couple of other data points that have left the experts concerned. These are the growth in private consumption as well as the private capex.

You see, for a country's GDP to grow, its citizens need to consume more i.e. buy more soaps, cars, clothes etc. Its companies also need to invest more in new plants and factories and lastly, the government also needs to build more roads, railways, ships etc.

Of late though, it is only the Indian government that seems to be on a spending spree whereas consumption as well as capital spending by private companies is quite sluggish to be honest.

To put things in perspective, while consumption growth stood at a measly 3.5%, investment in capex grew by a strong 10.6%, driven mostly by government led spending.

Thus, there is almost a consensus among experts that going forward, consumption growth as well as investments by the private sector would be the most critical aspects to watch out for.

Hence, in summary, the 8.4% GDP growth seems one time in nature owing to the strong buoyancy in tax collections and secondly, Government cannot continue to carry the burden of GDP growth indefinitely.

For a broad based and sustainable growth, both private consumption growth as well as private capital spending need to kick in.

Given this background, was it fair for the stock market to go up substantially and take the Sensex higher by more than 1,000 points in a single day? Do the GDP numbers for the third quarter deserve such a huge rally?

Well, before answering this question, one needs to figure out one's investing type. Are you the kind of investor who makes macro forecasts and then takes positions in stocks and sectors based on these forecasts?

If yes, then one needs to look at the fine print and dig deeper into the GDP data to know the actual state of affairs.

One can't blindly get into stocks just because the headline GDP number has come in at 8.4%. One must break the growth down into its component parts and then take an informed decision.

For us though, the macro data does not hold a lot of importance. You see, we recommend stocks with the assumption that the GDP will move along its long term trendline of 6-7% GDP growth.

We don't believe in making quarterly or even yearly forecasts of GDP and then recommend stocks based on the same.

We recommend a BUY based on whether the stock may end up giving good returns assuming the long-term GDP growth of 6-7%.

We won't recommend a stock if the outcome is dependent on the success or failure of a big macro forecast.

It is just the investment philosophy we have chosen to adopt. Forecasts are not for us. We believe more in reaction than prediction.

Thus, going back to the original question, our long-term projection of India's GDP growth of 6-7% remains unchanged.

We will continue to hunt for stocks based on the same projection. We are not going to revise this number upwards just on the basis of one or two quarters of above normal growth.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)