From economic “miracle” to soft patch.
Author: Regina Chi
September 13, 2019
India is the other Asian behemoth, home to more than a billion people, and one with a story of dazzling growth.
Indeed, the story of its economic “miracle” has besotted investors who have been overweight in the country for years, helping to push market returns well into positive territory in the first half of 2019, despite an increasingly challenging global environment.
The only problem? It’s a story that’s beginning to unravel as a glut of disappointing economic news begins to pile up and India’s official GDP figures are called into question. And while the government is attempting to staunch the flow of bad news with a number of new stimulus measures it is, in all likelihood, not enough to turn the economy around.
By the numbers
First, the figures. According to official government numbers, from fiscal 2011-12 and year-end 2016-17, India’s economy expanded by about 7% a year. However, those figures were denounced earlier this spring by former high-level economic officials who claim India’s true growth rate has been far slower. While the government has recently acknowledged growth is slowing the news got even grimmer last week. First quarter figures for the period ended in June showed growth slipped to 5%, led by a broad-based decline, with agriculture, industry and services as well as drop in domestic consumption, according to Credit Suisse.
Market watchers had already been revising their forecasts before last week’s news. Morgan Stanley, for one, recently ratcheted down their outlook figures for the year, citing weak domestic demand and continuing trade tensions. It pegged GDP growth at 6.3%, down from its former forecast of 6.5%. Moody’s followed suit, downgrading India’s GDP growth rate to 6.2% for the current fiscal year, down from earlier estimates of 6.8%. It’s important to note that these forecasts will need to be revised, given the first quarter figures.
This comes on the heels of dramatically slowing auto sales due to tight liquidity conditions led by the state banks and non-financial banking companies (NBFCs) who are faced with worsening credit quality and rising non-performing loans (NPLs). Earlier this month, the Society of Indian Automakers (SIAM) released figures showing sales of passenger vehicles slid 31% in July, the ninth straight month of decline and the worst one-month drop in more than 18 years.
The government has responded to slowing growth by slashing its key lending rate to its lowest level in nine years. It’s the fourth rate cut by Reserve Bank of India (RBI) in a year, and at 35 basis points, a more aggressive cut that market watchers were expecting. Meanwhile, just last week, the RBI issued a record US$24.4 billion payout to the government which will give authorities new tools with which to boost the economy, including the possibility of increasing spending to spur growth.
Certainly geopolitics are weighing on the economy. However, there are a number of structural issues that need to be addressed if India is to get back on track. At the moment, sluggish domestic consumption, tight liquidity conditions and a weak capital expenditure cycle are all hurting economic growth.
With low industrial capacity utilization, many Indian companies are focusing on deleveraging. Concerns about a global economic slowdown are also keeping them from increasing their capital spend in the short-term. Added to all of this is the double whammy in which India is juggling both a fiscal account deficit as well as a current account deficit, putting even more pressure on the economy when the US dollar strengthens against the rupee.
And while the market cheered the landslide reelection of Prime Minister Narendra Modi earlier this spring, he simply doesn’t have as many instruments at his disposal to shake up a weakening economy as do his counterparts in a managed economy like China.
The bottom line? The recent stimulus measures aren’t likely going to be enough to kick-start an economy that is slowing even more than market watchers had expected and investors should take a cautious approach.
At the moment, we believe investors with an interest in India should look to in those companies with market exposure outside of the country. These companies have the added benefit of a weaker rupee which makes their exports and services much more competitive.
Regina Chi is Vice-President and Portfolio Manager, AGF Investments Inc.. She is a regular contributor to AGF Perspectives.
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