Dear all, the stock markets have already discounted (by moving down, of course!) that India growth story may soften up a bit going into 2011. Did you ask how? It’s simple! Equity markets tend to digest latest news flow and adjust its pricing well in advance depending upon the scenario build up.
You might argue – just because stock markets have given up hopes, does it really warrant to say that growth is up for consolidation this year? No, that’s not the sole reason. Even the pointers indicate grave concerns for the economy – be it spiraling inflation, unsustainable current account deficit or higher input costs for the corporate India.
Let’s dig deeper into the macro-economic indicators to check whether they are indeed on a shaky grounds or whether the market participants are guesstimating a mountain out of a molehill:
Reason 1) High Inflation – Enough to keep Growth on check!
There is good news – finally! Onion prices have partially recouped to sombre Rs.25 per kg in retail mandis. And, yeah, they are now available much freely without any supply crunch domestically. But, does the buck stops over here? Not really!
A week ago, I visited a local juice vendor where I periodically go to sip-in real fruit juices of the season. The mosambi (sweet-lime) juice which used to cost me Rs.17 a year ago is now worth Rs.25 per glass. Reason – expensive fruit prices.
Similarly, though onion prices have come down to Rs.25 per kg; they’re still way above Rs.8 per kg that they used to quote just a couple of months back. So, what is the government’s take on this? Price has moved up based on a mix of internal and external circumstances – better change your lifestyle and eating habits. Onion is not the only food article at your disposal.
Though, fruit juices and onions do not affect India growth story by much; it’s the same sorry tale in the price trend of all major commodities including most of the food articles.
Ground Reality: Inflation has shot up to 8.43% in December as against 7.48% in November. Food inflation remains stubbornly high at 16.91%. Needless to say, markets have already felt jitters based on concerns emanating from this prime culprit.
Reason 2) Slow Reform Movement – Stalling Growth Prospects!
The reformist movement started off well during the phase 1 of UPA ruling. Though, the pace of reforms was mired by obstructive policies of Left-coalition partners, the seeds were sown for a fast-paced reformist movement in the ensuing phase which bypassed the Leftists altogether.
Further, the 2nd phase started off with the big-bang reform initiatives such as the Women’s Reservation Bill, the GST structure which intends to swallow all sundry taxes and biggest ever indirect tax reform in the form of DTC.
While DTC just managed to get the appointment of the Finance Minister by 2012, the GST reform got stuck in the mess of outstanding issues between the States and the Centre. To add to the woes, the emergence of the top scandals and frauds further mired the prospects of timely roll-out of GST, as opposition parties are in no mood to entertain any discussion in the Parliament until the Manmohan Singh government ratifies a JPC probe in the matter.
Ground Reality: The scandal debate has paralyzed the Parliamentary proceedings adding another thousand of crores to tax-payer’s wealth erosion. The winter session of Parliament has already dumped into drains; and now even the Budget session, which begins on February 21, stands the risk of being abandoned.
Reason 3) Earnings Slowdown – Impacted by higher Operating costs!
High inflation and rising interest rates scenario does not impact individuals and tax-payers alone. It also affects corporate profitability. Higher input costs leads to squeeze in corporate margins at operating level or a spill-over to generalized inflation if the same is passed on to final consumers.
While the pure commodity players are likely to benefit from the demand and supply mismatch, others involved in processing of raw-materials and turning them into finished goods might see an impact on the cost of goods sold and operating margins of the company.
In such a scenario, companies that rely on high volume growth and master cost efficiency techniques, can weather the crisis through strategic planning or sometimes even by passing on the rising input burden to the final consumers.
Ground Reality: The commodity cycle has yet again turned bullish. Manufacturing companies are more susceptible to such impact of rising raw material prices. The tremors of the same shall be felt in next few quarterly performances.
Reason 4) Current Account Deficit – Signs of Growing Concern!
India’s current account deficit has surged to 4.1% of GDP during second quarter of the fiscal as against 3.2% the previous year. Merchandise trade deficit widened to $35.4 billion during Q2 FY11 as against $31.6 billion in previous quarter as growth in imports far outpaced the progress in exports.
In its policy review, the RBI had warned that high current account deficit – 3.5% of GDP for the fiscal 2010-11 – is not sustainable. The central bank had also indicated that soaring oil prices could have negative impact on the trade balance going forward.
The high current account deficit coupled with large fiscal deficit could play havoc for India in sustaining in its dream run amongst other emerging market economies. According to DGFT, India’s trade deficit for the year is likely to range between $115-125 billion.
Ground Reality: High current account deficit could seem even more inflated in a likelihood of a reversal in foreign capital flows covering it.
Reason 5) Industrial Growth – A bit too volatile to Digest!
The volatility in the industrial output numbers announced over the last few months has left economists high-and-dry with regard to arriving at any type of conclusion on growth figures for the economy.
In latest, the core growth (country’s infrastructure sector output) registered a smart comeback in December with 6.6% growth. These core sectors – crude oil, petroleum refinery products, coal, cement and steel – accounts for almost a quarter of the country’s IIP. Thus, it raises hopes of robust December overall IIP data.
However, in November the slowdown in industrial production had hit an 18-month low of 2.7%, raising questions on the veracity of an index data. Further, lower growth in manufacturing and electricity has pulled down IIP growth in August 2010.
Ground Reality: FM Pranab Mukherjee has gone on record saying high inflation and weak IIP data were cause of concern and that the government was examining ways to shore up industrial production.
Remainder of the 5 reasons on why Indian growth story may derail will be published in Part 2 of this article.