It's The Worst Start To A Year In A Decade
Equities are down about 4% this year with the NSE nifty index off to the worst start to a year since 2016
On Episode 786 of The Core Report, financial journalist Govindraj Ethiraj talks to Dr. Ajit Ranade, Economist and Former Vice Chancellor of Gokhale Institute of Politics and Economics in Pune as well as Ashok Atluri, Chairman and Managing Director at Zen Technologies.
SHOW NOTES
(00:00) Stories Of The Day
(01:00) It's the worst start to a year in a decade, will it shift?
(05:03) Gold now clearly represents the hedge to an uncertain global economy
(07:51) A macro view on the Union Budget
(16:31) India’s anti-drone systems are gearing up for battle
(24:50) Why a toilet company is benefiting from the chip mania
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NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Thursday the 29th of January and this is Govindraj Ethiraj broadcasting and streaming usually weekdays from Mumbai, India's financial capital but in transit right now and also a warm welcome to our listeners in Finland where we've been hitting the charts in the last week.
And now it's back home with our top stories and themes for today…
It's the worst start to a year in a decade. Will the markets shift?
Gold now clearly represents the hedge to an uncertain global economy.
A macro view on the union budget.
India's anti-drone systems are gearing up for battle.
And how a toilet company is benefiting from the chip mania.
A Bad Start
The stock markets could be seeing the worst start to a year in a decade.
Equities are down about 4% this year with the NSE nifty index off to the worst start to a year since 2016 according to a report in Bloomberg which says that global funds remain net sellers of shares while heavy bond issuances continue to weigh on debt markets and local stocks have wiped out around 360 billion dollars in value so far this month according to Bloomberg data. Now while the last two trading sessions have seen some recovery the undertone does appear shaky given how the markets are swinging including on Tuesday where a last hour rally saw the markets jumping to end in the positive. Now there is some expectation that the budget will bat for a few things including the infrastructure sector which sent up capital expenditure linked stocks.
Investors were reacting to positive third quarter results along with the finalisation of the India European Union free trade agreement which of course is a strong political signal in terms of the new trading blocks that are getting formed India's own position and standing there and its ability to negotiate fresh contracts. Now what this will do to the United States is not clear though the initial reactions have not been very positive. The SENSEX closed up 487 points to 82,345 and the NIFTY 50 closed 167 points up at 25,343 both indices were swinging on Wednesday.
The broader markets were doing better the NIFTY mid cap and the NIFTY small cap 100 were up 1.6 percent and 2.2 percent. Amongst results quite expectedly Maruti Suzuki India's largest car maker posted its largest quarterly revenue growth in more than three years on Wednesday thanks to those goods and service tax or GST tax cuts and year-end demand. India is the world's third largest market and Maruti was the first of the automakers to report its earnings and its sales had touched a record high in the December quarter thanks to the steep tax cuts that made particularly the lower-end models more affordable.
According to a Reuters report which added that sales rose 22 percent in the three months ended December 31st led by a 26 percent jump in small car dispatches. Now the small car dispatches is an important point because the company itself had not been all that optimistic about small car sales picking up because of affordability concerns at the lower end. So the tax cuts which we saw clearly spurred demand at a level or higher than levels expected earlier.
Meanwhile on Wall Street AI is back in labour. The AI trade is lifting global markets as investors await a Federal Reserve interest rate decision. Global chip stocks and Nasdaq 100 futures rose after ASML a specialist in cutting-edge semiconductor machinery reported record orders according to the Wall Street Journal.
ASML's chief executive hailed growing confidence in the sustainability of AI related demand from chip making customers. Not that we would expect him to say anything else but news that China had started approving purchases of NVIDIA's H200 AI chip by Alibaba and others also helped. Meanwhile the rupee closed marginally weaker on Wednesday behind Asian peers on dollar demand linked to maturing non-deliverable forwards or NBF positions and month-end imported demand according to Reuters which added that the rupee ended at 91 rupees 78 paise per dollar slightly down from its previous close of 91 rupees 72 paise.
And then some economy news the index of industrial production rose to a 26-month high of 7.8 percent on year in December thanks to healthy consumer demand and that marked the second month of gains after the 7.2 percent in November. A note from Chris Hill said that while the benefits of GST rationalisation and domestic consumption are evident export-orientated sectors were a drag because of the higher tariffs levied by the United States. Going forward Chris Hill says domestic tailwinds should support demand in consumer segments for a few more quarters but adverse impact of higher U.S. tariffs on export segments could also get more pronounced and therefore a trade deal which could reduce the tariff to closer to levels faced by peers could help matters.
Gold
And gold prices continued their rise now it's about $5,300 per ounce for the first time on Wednesday now this time also because of a weakening confidence in the U.S. dollar and concerns about the independence of the U.S. Federal Reserve which boosted demand for the safe haven metal according to Reuters. Spot gold was about $5,255 an ounce on Wednesday morning after hitting that record of $5,311 per ounce. Now the thing you have to remember is that even $5,000 was a mid-to-year-end prediction or projection by most optimistic analysts or commodity experts in gold and we've already crossed 5,000.
A senior market analyst at excess.com told Reuters that gold is rising not merely because of market anxiety but also because confidence in the global monetary fiscal order is shifting towards a more cautious stance. And the U.S. dollar has been struggling near four-year lows on Wednesday after Trump, that's President Donald Trump, brushed off its recent weakness making dollar price bullion more attractive to overseas buyers. Gold has of course gained more than 20 percent since the start of this year which is now barely four weeks or less and the latest projection is and this time from Deutsche Bank that gold could climb to $6,000 an ounce thanks to investment demand.
Reuters also said that spot silver fell slightly to $111 an ounce after hitting a record high of $117 an ounce on Monday and it's already up 60 percent. Note that down 60 percent so far this year.
Why Is The Dollar Falling?
Well the dollar as we said slumped to its four-year low after President Donald Trump said he's comfortable with its recent decline.
No, I think it's great Bloomberg quoted Trump telling reporters in Iowa on Tuesday when asked if he was worried about the currency's drop. I think the value of the dollar look at the business we're doing the dollar is doing great he said but the dollar's drop is equally or rather more being driven by Trump's unpredictable policy making if you could call it that which has rattled overseas allies and investors. The dollar's recent drop has come despite a rise in government bond and expectations that the Fed is poised to pause its interest rate cuts both of which would have traditionally been supportive of the currency or seen as supportive of the currency according to that Wall Street Journal article.
Trump has long accused other countries of seeking weaker exchange rates to boost exports and Treasury Secretary Scott Besant has highlighted the distinction between the dollar's price and its value as a reserve currency. Some of the decline in the dollar has also been caused by the abrupt rebound in the yen last week since last week as traders based for a potential intervention by Japanese officials to prop up the yen according to that Wall Street Journal report.
The Union Budget 2026
The union budget will be the first to be presented on a Sunday and obviously comes at a time of considerable global economic turmoil which is weighing on and down Indian businesses even those who are not directly impacted by for instance the 50% tariffs on Indian exports to the U.S. So will this be that moment where we will see more dramatic changes and a clearer articulation of long-term economic vision by the finance minister and thus the government or will it be a more incremental shift or shifts in various policies including in taxes.
I reached out to Ajit Ranade economist and asked him for his three key takeaways from the union budget.
INTERVIEW TRANSCRIPT
Govindraj Ethiraj: Ajit, thank you so much for joining me. So, the union budget is coming up on Sunday, the 1st of February. We'll all be working, of course.
So, there are many issues which are quite relevant and critical, perhaps, given what's happening around the world. But looking domestically, one of the key priorities is obviously private sector investment, which has slowed down considerably. If I were to pick that amongst your three wish list items, what should we be doing there?
Ajit Ranade: So, Govind, growth rate of the economy is pretty good. In fact, the last quarter result, the quarterly growth was 8.2%, which is a very good number. And various agencies, including the IMF, are now forecasting India to grow at around 7.4% this year and maybe 7% plus next year. But we must remember that a big part of this growth has come because of a strong capex push, capital expenditure push given by the union government. It is now somewhere like, I think, 10 or 11 trillion rupees, 11 lakh crores, which has been good. And the aspirational thing about India is to get our capital expenditure as a percentage of GDP inching up to 5%, 6%, 7% of GDP.
But if you look at the overall investment spending in the economy, it consists of private and public expenditures. And the private investment spending used to be as high as 36%, even 38%. It peaked at 38% of GDP.
But for the last many years, it's been kind of sluggish, not growing vigorously. I think it's something like maybe 31% now. So it needs to inch up at least, at least to 2 or 3 percentage point.
And this is all the more important because the corporate balance sheet, you know, the companies who are expected to do this private sector investment spending, balance sheets have been improving. I mean, for the last many years, the deliberating, the debt burden has gone down. Profits are pretty good.
So really, we need to see a much more vigorous private sector investment spending. So maybe the budget will address that.
Govindraj Ethiraj: That's really a very high priority. So, I mean, there could, of course, be many ways of doing that. But what would you think could be a sound trigger in that direction?
Ajit Ranade: See, I mean, to put it kind of generically or a little philosophically, investors are looking for policies which have stability, continuity and predictability. That's why I think, I hope the FM can give a medium term growth strategy, which kind of lays down some policy framework or some kind of principles which are going to be predictable, stable and have continuity. So that's, you know, like a broad principle level.
One idea that I think can make a big difference is that capital spending does not get the full GST treatment. So as you know, GST is kind of a very big reform, which was rolled out in 2017. And progressively, recently, we saw a rate rationalisation, which they called GST 2.0, where rates were now, they have coalesced, they're just two rates now. But the capital spending, capital expenditure items do not get full input tax credit, which is the basic principle of GST. And that is why what happens is when companies spend on capital items, since the full refund on the input tax credit is not available, it acts as an extra tax on capital items. It's actually a consumption tax, which GST is supposed to be, ends up being partly a production tax on tax on investment activity. So that is one big thing that I think a reform is required.
The reason given to why capital items are not given full GST treatment is because they say capital spending gets depreciation benefits. But that is confusing two things. Depreciation is under income tax law.
GST is an indirect tax law. So we can have other countries have done it. So I think this is one reform I think will make a big difference to increasing private investment spending.
Govindraj Ethiraj: Right. The other thing that clearly we are staring at, given particularly where the dollar is right now, and amongst its most weakest points, is the lack of enough foreign direct investment. And of course, we are seeing continuous foreign portfolio outflows.
Do you have any thoughts there on what we could be doing to make FDI more attractive?
Ajit Ranade: So there are two different things. FII, that is foreign institutional investor, that is portfolio flows, and FDI. And net FDI last year actually went down almost to zero.
Even though the gross FDI had risen by 11% compared to the previous year, the outflow of FDI is rising much faster. And that's been going on for four or five years. So it used to be that a current account deficit of 2.5%, maybe 3% also, 2% to 2.5% was comfortably tackled. We had enough capital flows to take care of. But this year, even with a $50 billion, which is maybe a 0.5% or less than 1% current account deficit, we're finding it very difficult. And that's putting a lot of pressure because of the dollar shortage.
And that's why the rupee has slipped. I mean, it went down by 5% against the US dollar last year, on top of the fact that the dollar itself lost 11% against major currencies of the world. So the rupee slippage happened partly because of lack of capital inflow support to meet the current account deficit.
So we have to do something to ensure capital flows, both on portfolio, the stock market and bond market and FDI, continue to be healthy. And we also should pay attention to what is causing this outflow. Why are investors leaving?
And not just Indians investing abroad, but also foreigners. For example, large companies have either exited completely or reduced their stake in Indian subsidiaries. And then, of course, the Supreme Court, the court judgments on prospective tax or there was a judgement recently about some tax, which goes back to 2017, treatment of the Mauritius treaty thing.
So those are the kinds of things which are deterring, I think, which need to be looked at. We need definitely 2% or 3% of GDP as FDI, net FDI, for our growth. So I think it's essential.
Govindraj Ethiraj: Right. And, you know, one of the things that's been argued is that the need for somewhat more composite vision, which guides this budget, at least this one, and of course, all budgets in general. But what could that be if we were to have a more sort of composite vision in the context of growth and medium term growth?
Ajit Ranade: This budget will make our FM the longest, an FM who has served the longest term. So it's quite a big record. And ever since we had GST, the indirect tax part of the taxation is now governed by the GST council.
It's not really under the FM directly. And therefore, this is an opportunity to lay out kind of a state of the economy speech, or even more importantly, to lay out a medium to longer term growth strategy framework. Because we keep talking about Vixit Bharat, we keep talking about a target in 2047, where we want to reach a per capita income level of maybe 10 or $15,000.
But what is going to be the framework? What are going to be the principles? Most importantly, basically a framework which talks about stability and continuity of the policies, you know, as I said earlier, it's all going to be driven by the private sector growth, private sector investment and consumption and so on.
That's where this framework has to be laid out. For example, we are going to have a simplified tax system, we're going to have moderate tax rates, but they will be stable for several years, let's say. We are going to deal with GST, I told you one thing about capital items, but also in general, low and stable rates, and no changing year to year.
Let's say a fiscal strategy, which says that we are determined to, they talk about the glide path, so we are focussing not now so much on the fiscal deficit per se, but we'll ensure that the debt to GDP ratio comes down gradually to 60% and so on and so on. So these are the kind of things which kind of make promises about or make a commitment towards a medium term strategy framework. I think that is important.
Govindraj Ethiraj: Ajit, thank you so much for joining me.
Ajit Ranade: Thank you, Govind.
Anti-Drones
A few weeks ago India's army chief had said that the head of Pakistan's military operations had been told to control what he said were drone intrusions from Pakistan into India and this was months after the conflict between India and Pakistan. An Indian military source told Reuters there were five drone intrusions in that week on the frontier in the Jammu region of Indian Kashmir and in another incident on Friday a drone from Pakistan was suspected to have dropped arms and ammunition.
The Indian army chief told reporters that he believed these drones were defensive ones which essentially were testing if any action would be taken and he was speaking at an annual press conference ahead of army day on the 15th of January that is two weeks ago. While there has been much discussion on drones, drone manufacture and applications on the core report there is lesser focus on anti-drone warfare all of which becomes important in the context of the union budget coming up because it's likely to see increased defence expenditure. I spoke with Ashok Atluri, chairman of Zen Technologies a company that makes anti-drone systems and I began by asking what was the key focus of his systems and also how software was driving efficacy.
INTERVIEW TRANSCRIPT
Ashok Atluri: The anti-drone systems, initially the whole world was focused on drones without really appreciating the threat. Very early on in 2018, you know, we started doing investing in R&D of this product and we always believed that unless we own the IP of the deep IP of the product, you know, we don't have any advantage. India doesn't have any advantage because this is such an evolving threat.
As the threats evolve, your anti-drone strategies, counter-drone strategies should also evolve, the technology should also evolve. So, we started that in 2021-22, quite in three to four years, we got an order from Ministry of Defence. Later, what we have seen is that as the system, you know, from just software only drones to, you know, initially they were all ground controlled, then they become autonomous.
So, this evolution was happening when there are become GPS driven drones, we denied them GPS through spoofing, GPS spoofing. But then they became completely, now the drones that are coming are completely AI based and, you know, vision based and now we have to actually shoot them down. So, soft kill to hard kill transition has happened and everything has been done required to be done in-house by Zen.
And what we feel is that we are at a very, very good position at this point in time, as was proven in the Operation Sindoor that, you know, our systems that were deployed work very, very well in blocking the incoming drones.
Govindraj Ethiraj: Right. When you look at drones or think about drones today, one, I guess, in the context of Russia, Ukraine, we think of quadcopters, which are assembled typically almost on the fly, as in they're assembled and sent into the field with some kind of load, which could be weapons and so on. And then, as you said, they're also becoming autonomous in the true sense and allowing AI to finally zero in on the kill.
What are the kind of drones that we typically are ready for? Or are your systems ready for?
Ashok Atluri: At this point in time, they can handle any kind of drone. Drones that are now being used extensively are the autonomous drones and there's something called an optical fibre control drone, the FPV kind of drones, which don't require any signal to be blocked or anything. In both the cases, the only way to bring them down is by actually shooting them down.
So, we have integrated our anti-drone system with remote control weapon station, where the moment a drone is detected, by the way, these drones are detectable because they can be detected on the radar, we can shoot them down. So, at this point in time, we can handle the most advanced of the drone threats that we have in the battle zone.
Govindraj Ethiraj: So, when you said drones, I mean, that includes, let's say, a fixed-wing aircraft kind of drone as well as a quadcopter kind of drone?
Ashok Atluri: Absolutely. Yeah, it includes both.
Govindraj Ethiraj: Okay. Now, the ones we saw in Operation Sindoor, for example, as I understand, maybe came from countries like Turkey and were fairly sophisticated. So, I'm just trying to understand what's the difference between, let's say, traditional anti-missile technology or traditional or anti-missile technology versus a drone-specific technology or an anti-drone-specific technology?
Ashok Atluri: One thing is the speed of the drones isn't, you know, the missiles can go at max speeds, very, very high speeds. But in the case of drones, if they achieve a speed of about 600 to 800 kilometres, they're supposed to be pretty good. Otherwise, typically, they may go anywhere up to around 200 to 300 kilometres.
One is the speed. And again, typically, the sizes have not been that big in the cases of drones. But again, the Shahid drones and those are started making exceptions, you know, where their size is reasonably okay.
And they're very low cost, I think, compared to actual missiles. These drones are not very that you can put a payload of C4 into any commercial thing, and it becomes a very, very big security hazard. I think the low cost and the limited range is something which is different from a missile.
Govindraj Ethiraj: Okay, to come back to, let's say, what we're seeing right now, again, Russia, Ukraine is a good example. And Ukrainians have been evolving quite rapidly on the field. What are the trends that you're seeing in terms of the technology that's being used by those who make the drones, whether it's organised or unorganised versus what you are trying to do to stop it?
Ashok Atluri: I think we are keeping tabs on what is happening at the drone. I do think that, you know, the foreign market is more evolved than what's happening in India at this point in time. But I think there is tremendous amount of effort being put in by the drone ecosystem in India to match what is coming up there.
The anti-drone technology that we are having, we have gone to foreign exhibitions and a lot of people were actually flabbergasted the amount of work we have done in the anti-drone space. In the sense, typically, most of the companies, almost, you know, 80-85% of the companies just focus on blocking commercial frequency drones. But the reality is drones will come in any frequency.
We call it wideband. You know, so it is not only the commercial 2.4 or 5.8 or the ISM band that the drones come in. As a bad actor, I will not follow those guidelines.
I can come in any drone. So that was one of the reasons that our anti-drone system worked very well because they were able to block and we saw non-commercial frequency drones coming in. Those are the advantages of actually writing the code from the ground zero and making the product and then giving it to the armed forces.
And that is the reason, you know, when any upgrade has to be done, we can respond very, very fast because we don't have to go to any foreign company or foreign country to ask the source code. The source code is completely developed in India.
Govindraj Ethiraj: As a slightly larger question, I mean, you've been in simulators all these years, including army and naval simulators, and now you're an anti-drone. What's the common thread between these and that can also be applied to other areas or what could find other applications going forward?
Ashok Atluri: See, army simulators, we have been there forever and, you know, initially, especially in the 90s, people wouldn't believe that we had developed it. And the second question was there was no preference for Indian companies at that point in time. We have competed with all the foreign companies, beaten them, and we have been able to actually get the world-class technology in-house in India.
What is the key takeaway from this? I think the key takeaway has been in terms of the ownership of the IP is very, very important for us. If you don't own the IP, then you don't own the product and the equipment is not yours.
And at any point in time, the equipment may fail. We don't know if this is a stuxnet in an Iranian nuclear facility or is it the pager that you are carrying the bomb is hidden in the hardware, forget the software. So, you know, it can be triggered at any point in time.
And you are actually the amount of threat we are exposed to if we are to get the foreign products in our case. And will they work in the actual field if it has some hidden components, some bad actors? We don't know.
So I think it's a very dangerous situation if we don't own the IP. So across the underlying thread is if you don't own the IP, you don't own the product. In the worst situation, will they actually work or will they fail?
Govindraj Ethiraj: Right. Last question. So I know it's sometimes difficult to put a percentage to this, but if I were to ask you, what's the split between the software IP and the hardware IP in the products that you manufacture?
Maybe in terms of effort, what would it be?
Ashok Atluri: I would typically say that, you know, 30 to 35% is hardware and the remaining 65 to 70% is software.
Govindraj Ethiraj: Okay. And that I'm assuming is clearly what gives any company or country for that matter, the edge.
Ashok Atluri: 100% right on that point.
Govindraj Ethiraj: Right. Ashok, it's been a pleasure. Thank you so much for joining me.
Ashok Atluri: Thanks.
Toilet Tales
Shares of Japanese toilet maker Toto gained the most in five years thanks to booming memory demand which spurred expectations of growth in its less known or little known chip making materials operations according to a Bloomberg report the stock was up as much as 11 percent its deepest rise since February 21 that's five years ago. After Goldman Sachs analysts said Toto's electrostatic chucks used in NAND chip making will likely benefit from an AI infrastructure buildout that's tightening supplies of both high-end and commodity memory.
Toto is known for its heated toilet seats and it's a maker of washlets but has also for decades been part of the semiconductor and display supply chain via its advanced ceramic parts and films according to Bloomberg. The electrostatic chucks which it began mass producing in 1988 are used to hold silicon wafers in place during chip making while helping control temperature and contamination according to the company. The company's new domain business accounted for 42 percent of its total operating income for the last year according to Bloomberg data.
So basically fine ceramics are similar to sanitary ceramics used in Toto's toilets but with strength comparable to metals says Bloomberg and ceramic of course is lighter than metal and able to resist higher temperatures without interfering electrically with chip making tools but are more brittle and costly. All of which you could remember or keep in mind next time you are sitting on that toilet seat.
