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Variations in Market Result QI 2024
Context:
The market Q1 2024 results highlight a diverse performance landscape, with some sectors like capital goods, technology, pharma , automobile and defence showing strength, while others, particularly oil & gas and BFSI, are grappling with significant challenges.
Reasons for Growth in these sectors:
Capital Goods:
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- The government’s increased focus on capital expenditure (Capex) has significantly boosted the capital goods sector. Key developments include:
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- Budget Increase: Infrastructure budget for 2023-24 rose to ₹10 lakh crore (3.3% of GDP), boosting demand for capital goods.
- National Capital Goods Policy: Aims to grow production to 115 billion USD crore by 2025.
- The National Infrastructure Pipeline boosts the capital goods sector by driving significant investments in infrastructure, leading to increased demand for machinery and equipment.
- PM Gati Shakti: This program aims to improve logistics creating a conducive environment for capital goods manufacturing.
- Production Linked Incentive (PLI) Scheme: $26 billion incentive program to promote manufacturing in the capital goods sector.
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- Regulatory Reforms: The government allows 100% foreign direct investment under the automatic route, encouraging global players to invest in India’s capital goods sector
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Capital Goods in India’s export basket
- From FY23 to FY24, the share of capital goods in total merchandise exports increased significantly to around 19%. This growth indicates that India supplies more machinery, equipment, and durable goods used in production, which suggests that the country may be expanding or upgrading its industrial capabilities.
- Major Goods Exported by Advanced Economies: Advanced economies focus on exporting high-value manufactured goods, machinery, and technology, which are crucial for their economic growth.
- Economists argue that exports of capital goods and technology-intensive products are crucial for economic development.
- According to Ha-Joon Chang‘s book “Kicking Away the Ladder“, countries that have successfully industrialised, such as the United States and Germany, initially protected their infant industries and promoted exports of capital goods.
- Similarly, Dani Rodrik‘s research suggests that diversifying exports towards more sophisticated products, including capital goods, is associated with higher economic growth.
Auto Sector:
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- Easing of supply chain constraints, particularly in semiconductor availability.
- The sector benefited from a recovery in consumer spending and favourable government policies promoting electric mobility.
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Pharma:
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- Increased healthcare spending, both public and private
- Growing demand for generic drugs in domestic and international markets
- R&D investments leading to new drug approvals
- Expansion of health insurance coverage increasing access to medicines
- Ageing population in many countries driving demand for pharmaceuticals
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Implications of these sectors performing well
- Economic growth: These sectors collectively contribute significantly to GDP.
- Employment generation: All three are major employers
- Export potential: Both pharma and auto are important export sectors for many countries.
- Investor confidence: Likely to attract more investment in these sectors.
Reasons for decline in the sectors:
Oil & gas:
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- Geopolitical and Economic Disruptions: The sector is influenced by geopolitical tensions and macroeconomic variables like high interest rates, which can affect investment and operational costs.
- Production Cuts and Demand Issues: Despite OPEC+ extending production cuts, demand has not sufficiently rebounded to offset the oversupply, leading to continued pressure on prices and profitability
- Transition towards renewable energy affecting long-term outlook
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Government steps to boost oil and gas sector:
- Hydrocarbon Exploration and Licensing Policy (HELP): Introduced in 2019, HELP simplifies the licensing process and offers attractive terms to boost exploration activities
- National Biofuel Policy, 2018: This policy aims to boost the availability of biofuels in the country and increase the usage of alternate fuels like ethanol, biodiesel, and bio-CNG through blending programs.
- Ethanol Blended Petrol (EBP) Programme: The government has advanced the target for 20% ethanol blending with petrol to 2025-26 from 2030 to reduce oil imports and promote biofuels.
- Infrastructure Development: Under Natural Gas Pipeline Network India is developing a 22,306 km natural gas pipeline network to improve gas connectivity across the country
- Banking , Finance and Insurance (BFSI) sectors saw decline or slow growth due to
- The global banking crisis, including issues with banks like Silicon Valley Bank and Credit Suisse, has led to uncertainty and a slowdown in the BFSI sector.
- High NPAs: Elevated non-performing assets (NPAs) are affecting profitability and reducing banks’ willingness to extend new credit.
- Cautious Lending: Banks are becoming more risk-averse, particularly in high-risk sectors, slowing overall credit growth.
