The Adani fallout: Will India miss the GDP Growth estimates?

Now that the immediate ramifications on the Adani FPO due to the Hindenburg Report is well behind us and the Indian capital markets saw a meltdown in the Adani group stocks and there seems to be a sense of stabilization, the question is: will this shakeout impact India’s economic growth rate?

First things first, let us quickly look at the Market Cap to GDP ratio of the top 3 corporations in India and see how things line up.

GroupMarket Cap (INR  Trillion)% of GDPRevenue (INR Crore/2022)% of GDP

Source: Research from Newspaper Reports. Estimated India’s GDP in 2022: 294 Trillion ($3.14 Trillion).

While we talk of capital markets versus GDP, comparing market cap of listed companies and the percentage of GDP may appear to be logical. However, it is more appropriate to look at the annual revenue of each company since they directly contribute to the GDP.

There’s a catch, however, in the above argument since we are looking at historical data whereas the question is that of what happens in the future. Market cap directly represents the health of a company’s stock price. A highly sought after stock with a decent P/E ratio, among other things, contributes to garnering good Credit ratings (there are a lot of exceptions in this statement but for this particular argument we go by the simpleness of what this line states). A good Credit Rating is essential to raise capital and raising capital is essential for production which in turn contributes to economic growth. It’s a chain reaction.

We cite two specific case studies from leading research reports.

  • Theoretically, growth in capital markets has a direct correlation, with exceptions, with the growth in a country’s GDP. While the period between 1980 to 2013 in the US, this trend seems to have broken as per research.
  • Source: Here
  • But if one were to hold this general belief that economic growth is good for stock markets, then by extension, investors should prefer to invest in countries where the long term growth outlook is strong. However, when we take the example of China between CY08 to CY17, the country registered 8.2% GDP CAGR (real), but during the same period Shanghai Shenzhen CSI 300 Index was down 24.5%. Following table shows nominal GDP CAGR (in USD) of select four counties and their respective equity market performance (in USD).
  • Source: Here

A much cited report by Jay Ritter’s research found that while there is a positive correlation between the stock market and GDP growth in the short run, over longer time periods (such as 10 years or more), the correlation becomes negative. This means that higher GDP growth does not necessarily lead to higher stock market returns in the long run, and vice versa.

Ritter’s research looks at data over a long period (over 10 years) and we are talking about shorter periods. If you go by the classical theory, Adani group’s ability to raise fresh capital stunted the group’s ability to participate in the economic growth as it did in the past is uncertain.

The ramifications could be much larger. The Hindenburg report not only impacted the Adani group stocks and corporate bonds but it also exposed gaps in the country’s regulations and business environment. This could potentially hurt foreign investment in India which is crucial for the GDP goals the current government has taken up.

Assuming that these sentiments are short lived; and in the backdrop of Adani taking a step-back and getting to clean its books by way of optimizing its leverages; getting an independent auditor to look at its books and recommend remedies or certify that it is not in fault as reported by Hindenburg’s research, the global sentiment towards India may ease faster. In this light, the Tata deal for 480 aircrafts from Boeing and Airbus has significance. Tatas have to depend upon external borrowings and at favorable credit ratings. By offering to buy the aircraft from the US and UK it is also contributing to job creation in those countries, something which both heads of state in a rare show have openly appreciated. These things will place India’s ability to raise external borrowings and attract investment in a good position.

As it appears we can only see a minor blip in the journey towards a $5 Trillion GDP in the next couple of years.