Indian shares endured their worst July in 17 years, a sign that stewing trouble in the country’s economy has been catching up with the stock market after a stellar run. 

Equities hit record highs on the back of Prime Minister Narendra Modi’s re-election in late May, with investors betting that his return with a strong mandate would bring about a wave of business-friendly, pocket-lining reforms such as privatisation of state assets and the relaxation of labour laws. 

But Indians have been battered by a stream of bad economic news since, prompting a sharp correction in stocks. The benchmark Nifty index fell 6 per cent in July, the worst since July 2002, and has lost 9 per cent since its record high in early June. 

The rout has exacerbated concerns that shares in India, along with other emerging markets like China or Brazil, are losing their shine as growth slows and a recent trend of globalisation unravels. 

“Earlier we thought this was a cyclical issue, but now the slowdown is getting more structural in nature. It’s taking in a lot of industries,” said Rusmik Oza, head of research at brokerage Kotak Securities. “It needs a lot of bold measures for us to come out of this problem.” 

Soon after Mr Modi’s re-election, India lost its claim to being the world’s fastest-growing large economy to China, when it emerged that gross domestic product growth slowed to 5.8 per cent in the first quarter of 2019, a five-year low and down from 6.6 per cent in the final quarter of 2018. More data showed unemployment at its highest level in decades. 

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The strain has been reflected in a number of industries, with carmakers the most high-profile victims of the recent malaise. Car sales have endured their worst spell since the turn of the millennium, falling 24 per cent in June and 26 per cent in May, compared with the same time a year earlier.

Total sales for July have not yet been released, but Maruti Suzuki, India’s largest carmaker which makes almost half the country’s cars, said this week its sales dropped 36 per cent in July from a year earlier. Maruti’s shares lost 16 per cent over the course of July and it reported a 27 per cent drop in its net profit for the quarter ended June. 

Shares in other major vehicle makers like Tata Motors and Mahindra & Mahindra also ended July lower. 

Analysts said they do not see an easy solution for the carmakers and their share prices amid a global slowdown. “The key question to ponder is, is this the new normal?” said brokerage Edelweiss. “The near-term outlook is bleak.” 

But the sell-off in stocks has been exacerbated in part by some of the Modi government’s early moves, with investors feeling that the government missed an opportunity to enact bold reforms when it unveiled its first annual budget in July. 

In one measure that spooked traders, finance minister Nirmala Sitharaman announced that she would increase a tax on India’s “super-rich” to more than 40 per cent, a move that includes foreign trusts investing in India. 

That prompted some investors to leave their positions, with net outflows from foreign portfolio investors of $5.5bn in July, according to rating agency Care, ending a trend of money flowing into the country from overseas. 

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Via Financial Times