India: Annual Stock Market Pattern And Macro Fiscal Flows

by: Alan Longbon

The national government budget pattern causes a fairly reliable stock market movement each year.

In April each year, money is drained out of the private domestic sector by taxes, and the stock market sinks around this time.

After April and into the rest of the calendar year, the stock market tends to rise.

A decade of consistent expansionary budgets and a relatively balanced current account have enabled the Indian stock market to be the best performing since at least 2000.

The purpose of this article is to assess the macro fiscal flows for India and determine what effect these flows will have on the stock market and the economy.

Macro fiscal flows impact investment markets with a lagged effect of typically one month. A flow of funds now from government spending or bank credit creation will lead to a boost in investment markets one month later.

To understand the fiscal flows, one has to look at the balance of sectoral flows within the Indian economy using stock flow-consistent sectoral flow analysis.

Professor Wynne Godley first comprehended the strategic importance of the accounting identity, which says that measured at current prices, the government's budget balance, less the current account balance, by definition is equal to the private sector balance.

GDP = Federal Spending [G] + Non-Federal spending [P] + Net Exports [X].

As a percentage of GDP, all three sectors sum to zero and balance each other out.

The chart below shows the national budget information to January 2019.

Indian govt budget 2019

The Indian federal government is the sovereign currency issuer, and if it needed money to fund its operations, it could have keyboarded it into existence and spent it into the economy in what is known as a vertical financial transaction. It never needs to take it from another source through taxation or bonds.

The chart below shows credit creation by commercial banks over the last year.

Indian loan growth 2019 Over the past calendar year, credit creation has been constructive and has consistently grown at about 14%. This comes off a small base in terms of percentage of GDP as the chart below shows and represents the private domestic sector deficit. 49% of GDP or about US$1.3 trillion. Most developed nations have a private debt to GDP ratio of over 200%.

India private sector debt % of GDP

The following chart shows the current account over a similar period:

India current account 2019 India's current account is in deficit, meaning that it is swapping rupee credits (or more likely foreign currency such as the USD that it has to borrow or earn), which it can make at no cost electronically on a keyboard, for real goods and services from foreign trade partners who are happy to save in rupees. The former is a good situation to be in. Few understand the concept of the privilege that a coveted sovereign currency provides. It is essentially a free lunch earned from the quality and good standing of the currency. The stronger the currency, the more resources one can obtain with it. The latter situation (payment in USD) is not a good one as foreign currency has to be earned or borrowed.

What becomes relevant for a developing nation is to what level it has been loaded up with foreign debt, and this is shown in the chart below.

India foreign debt 2019 India has over half a trillion USD million in foreign debt, most probably mostly denominated in USD. This is about 50% of GDP and makes India vulnerable to outside influence.

Under today's global linkages this foreign debt is the main lever to turn democracies into oligarchies. The 2012-2015 crises in Argentina and Greece showed how little sovereignty debtor countries have in the face of the absence of an international court recognizing the ultimate need to write down sovereign debts. Threats by bondholders to cut off credit cause banking chaos and seize public assets to pay vulture funds and other creditors enable the IMF, the European Central Bank and even vulture funds to override democratic regimes and public referendums. The upshot is that it doesn't matter what voters want or whom they elect. Economic policy is dictated by the bondholders, and they are rapacious in demanding austerity and kindred IMF conditionalities. - (Source: Hudson, Michael. J IS FOR JUNK ECONOMICS: A Guide To Reality In An Age Of Deception. ISLET/Verlag. Kindle Edition)

Sectoral Balances

Taking the above information for international and national macro fiscal flows, one can calculate the sectoral balances, and these are shown in the table below.

India sectoral balances 2019 (Source: Trading Economics dot com plus author calculations)

*Estimate to be updated when the end-of-year numbers are known.

#Forecast based on existing flow rates and plans.

The table shows that the private domestic sector is in positive territory, which allows it to accumulate net financial assets. The drain from the external sector is offset by the positive flow of funds from the government sector.

Impact on the Stock Market

India has had the best-performing stock market since the 2000 dotcom and 2008 GFC boom-busts as the chart below shows.

world stock markets to 2019

The question is how and why has this occurred? It is all the more notable as it has occurred against a headwind of economic mismanagement such as:

1. Introduction of a value-added tax that complicated doing business, destroyed many small operators and drained money out of the private domestic sector.

2. A clampdown on gold transactions often used as an alternative currency unit.

3. The removal of certain banknotes from circulation to make cash transactions harder to implement and so hinder the largely tax-free cash economy. This again, at the macro level, is currency and wealth destruction.

Below is a chart of the stock market over the last 10 years set above a chart of the national government budget and the current account balance over the same period.

India stock market 10 year India govt budget to 2019

The Indian government presents its national budget on the first day of February so that it can be passed into law by Parliament before the commencement of new financial year in April. The flow of funds shows the addition of liquidity flows at the beginning of the calendar year, a big drain in April as taxes are paid, and then increasing inflows peaking again in February of each year when the new national budget comes into effect.

The chart below for this last year shows this flow of funds impact to good effect. One notices the lagged effect of the flow of funds. The tax cash drain peaking in April caused the stock market to fall, and then the stock market rose again in tandem with government expenditure.

India stock market and gov flow of funds At the long-term macro level, one sees that the Indian government has been injecting more money into the economy each year than the last and that the injection of money has always exceeded the current account deficit. The positive balance resulting in the private domestic sector has provided the flows of funds that have allowed the stock market to grow on a consistent, steady basis for over a decade.

While the government flow of funds has a steady identifiable budget based heartbeat pattern to it, the same cannot be said of the current account. The current account flow of funds appears random, and because it is a small percentage of GDP, it has little or any influence on the stock market on a consistent tradeable basis.

When one contrasts this phenomenon with the stock market, in the chart above, they see that generally speaking, each calendar year begins with a dip and then a recovery - money extraction followed by money injection.

One must also observe the current account flow of funds and the global macro influences as well.

The chart below was kindly produced for me by Mr. Robert P. Balan as part of his PAM service and shows global financial flows for the five largest developed economies in the world. I recommend the PAM service for its advanced fiscal flow analytical capabilities.

G5 bank balances The chart shows that global G5 bank balances are bottoming at present and will rise sharply into June 2019. This means that the Indian national spend, after the April 2019 national liquidity down-phase, will be taking place against a background climate of higher world fiscal flows and means that the Indian stock market is likely to perform well into summer and then sag into the end of the year as both national and international fiscal flows peter out. The Indian stock market may outperform others after June given the strong national flow of funds and then sink into April of 2020.

An investor wishing to trade these stock market movements could do so using the following Indian ETF funds that mirror the broad stock market index:


iShares MSCI India ETF


WisdomTree India Earnings Fund


iShares India 50 ETF


iShares MSCI India Small-Cap ETF


Invesco India ETF


VanEck Vectors India Small-Cap Index ETF


Columbia India Consumer ETF


Direxion Daily India Bull 3x Shares


Columbia India Infrastructure Index Fund


Columbia India Small Cap Fund


Franklin FTSE India ETF


First Trust India NIFTY 50 Equal Weight ETF

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.