Is the world’s fastest growing economy slowing down?
This is a question bothering many experts, especially after the recent IIP numbers showed a mere 0.5 percent growth for November as against the 8.4 percent growth in October. While one justification for the numbers is that this year Diwali was in November (hence production was done in the previous months to make it available during Diwali time), while it was in October last year. However, even after accounting for this seasonality factor, there are indications that the economy is slowing down.
Let us look at the auto numbers, which clearly shows that the demand has been soft. Car sales for December were at 2.36 lacs as against November sales of 2.63 lacs. Maruti Suzuki – the largest car maker – has announced that it would see a mere single digit growth in FY2019. In the last few years, Maruti was growing in double digits. Even the commercial vehicle sales were down in December. Bikes and scooters—that do not warrant higher budget – have also seen demand going soft.
Even the sales of consumer durables are not showing much robustness. The growth in the aviation passenger traffic hit a 4-year low in November. Even real estate sector, despite the low prices and heavy discounts, is finding it tough to find buyers.
The rural income is also not growing and there are reports that farmers are in distress. That means the rural demand that was going strong not so long ago has also turned weak. With lower sowing during the rabi crop season, the situation is unlikely to improve soon. FMCG companies’ commentary on December quarterly results will throw some light on the ground realities in rural consumption.
The Indian economy grew at a brisk pace of 8.2 per cent in Q1 of FY2019 and dropped to 7.1 per cent in Q2. The next two quarters may see decline in the GDP. Reports suggest that the Indian economy may grow at 7 per cent in the current financial year. This despite the World Bank’s recent report suggesting that the Indian economy would grow at a faster pace of 7.5 per cent in 2019 as against the prediction of 7.3 per cent for 2018. It looks like the World Bank may need to revise its target downward.
Due to the decelerating growth and lower inflation rate, the demand is back again that the RBI should cut interest rate in its next policy meeting on 7th February. It looks like the RBI may oblige this time as low inflation and slower growth does warrant action from the central bank, even considering the global implications. US Fed Chairman Jerome Powell had indicated that the rate hike is not a certainty. He recently said that they are “patient and watching and waiting and seeing”. Fed has given an indication that it would do two rate hikes in 2019. But it is likely that we may see less than two rate hikes. This should make the RBI comfortable in terms of easing the rates.
The RBI understands that the global economy is slowing down, and hence, it may not be easy for India to grow at a faster clip with higher interest rate. The rupee has stabilized against the dollar.
Another problem is that this is an election year. So, new projects and plans will take a back seat. Even private sector players have put projects on hold as they would like to see the composition of the new government and its agenda for the future. In the next 40 days, the election schedule would be announced. The government machinery would be in a slow mode till the new government takes over the reins. That could impact the economic activity. While one may argue that the election spending may spur more consumption, this may not reflect in the March quarter numbers. Even during the last general election, the March 2014 GDP number remained depressed.
India Inc has been always expecting growth in earnings that could justify higher valuations. We have seen disappointment on this front in the last few years. It looks like the numbers for the next two quarters (December and March) may disappoint too due to slowdown in the domestic as well as world economy. I see remote possibility of earnings lifting the market sentiments, at least till July.
Finance Minister Arun Jaitley will present the budget on 1st February, but one should not expect any major announcements, except for some populist measures. In the last few months, the Modi government has gone in active mode to win the electorate with measures like quota for higher castes, GST relief, and so on. This has created fear of slipping on fiscal deficit. In that sense, there is nothing much to cheer about on the macroeconomic front. Market will take note of this.
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The views and opinions expressed in this article are those of the author and do not necessarily reflect the official VIEW or position of Credent Asset Management Services Pvt Ltd.