A woman walks past the National Stock Exchange (NSE) in Mumbai in November 2019. Photo: NurPhoto

India’s economy contracted by 7.5% in the latest quarter as the nation struggles to recover from large-scale disruptions in manufacturing, services and supply chains caused by Covid-19 and associated lockdowns.

But that’s not putting off investors, as foreigners pump up India’s stock markets near all-time highs. Foreign portfolio investors bought more than US$8.13 billion worth of equities in November, the highest monthly amount since Indian stock markets were opened to overseas investors in 1993.

That’s in stark contrast to the real economy, which suffered its steepest-ever contraction in two successive quarters. The sectors most affected were mining, manufacturing, production of cement, cargo and passengers at seaports, airports and railways, the government said on Friday.

India’s eight core industries in October contracted by 2.5%, compared with being 0.1% down in September. These industries are coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity.

India’s gross domestic product (GDP) contracted 23.9% in the quarter to June 30. GDP contraction in the six months to September 30 was 15.7%, compared with 4.8% growth in the same period last year.

Sale of commercial vehicles in the quarter to September 30 contracted 20.1% compared with 35% in the previous quarter. Cargo and passengers handled at airports too shrunk by 23.1% and 77.4% during the quarter. Gross fixed capital formation improved during the quarter to 29% from 22.3% in the first quarter.

The contraction in GDP during the three months ended September 30 was less than the 8.6% contraction forecast by the Reserve Bank of India on November 18. The RBI said on October 9 it expected full-year GDP to shrink 9.5% in the year to March 31, 2021.

“The primary factor driving the better growth estimate is good corporate performance during the second quarter typified by high growth in profits due to major cost cutting by companies,’’ said Madan Sabnavis, chief economist with CARE Ratings in Mumbai.

To be sure, India’s economy was slowing even before the pandemic and lockdown. In the January to March quarter this year, GDP grew 3.1%, and in the full year to March 31, GDP grew by 4.2%, compared with 7.9% in the year ended March 2017.

Still, the economy is beginning to exhibit a stronger than expected pick-up in the momentum of recovery, RBI governor Shaktikanta Das said on Thursday.

“The global economy has also witnessed a stronger than expected rebound in activity in the third quarter,” Das said on November 26. “The IMF [International Monetary Fund] has accordingly revised its assessment for global growth in 2020 to a less severe contraction than what was assessed in June 2020.’’

Equity investors clearly see an upside on the horizon. Foreign investment in equities so far this year is at around $14.6 billion, compared with $14.4 billion in 2019. If this year’s investment maintains or surpasses this level, it will be the highest since 2014 when global investors bought $16.1 billion of Indian stocks.

Domestic institutions, in contrast, have been net selling intermittently.

Economists and stock market analysts are baffled at the 70% rise in the key Nifty index of the National Stock Exchange and Sensex of the BSE after dipping in March as the pandemic struck the country and the government imposed a lockdown, severely curtailing production and supplies, and causing job losses for almost 120 million workers in May and June. 

Sales in some sectors including automobiles, tractors and other farm equipment, as well as cement and steel, have picked up but the jury is still out on whether the pick-up is just from postponed demand from the lockdown period or is actually fresh demand. Some demand may also be from annual Diwali festival purchases.

Another negative that is quietly draining national resources is China’s incursion into Indian territories in Ladakh and the aggressive positioning of its troops, forcing India to do the same in some areas which were left unguarded during the winter months.

Keeping troops on the border, and artillery, tanks, fighter jets and other defense systems in readiness, is draining national resources that could have been used for infrastructure development to provide jobs or other means to revive the economy, especially during the pandemic.

Stock market investors, especially global investors, seem to be ignoring all these negative aspects. A key element buoying stock indices is the cheap money sloshing around advanced economies and moving into emerging market equities.

Investors expect the availability of a Covid-19 vaccine over the next few months will enable economies to fully remove all the remaining lockdown restrictions and grant individuals the freedom to travel and mingle again, which will also help revive the economy.

The lockdown has forced many companies across the globe to cut the expenses of a working office, travel and perks, while encouraging employees to work from home.  

Still, skeptics feel the surge in select stock prices with greater weight in the index may be a case of “irrational exuberance” of a quick resumption in investments, which may or may not come any time soon.