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Sweet forecasts and bitter realities


To say that the beginning of 2016 has been bad would be an understatement. The comical attempts of the Chinese regulators to impose new circuit mechanisms, which were partly responsible for the massive sell offs across the word.
The attempts of the Chinese regulators to control the financial markets also showcased the ineptness after they removed the new circuit mechanism in a matter of weeks. Given their repeated interventions and the disastrous results it is safe to assume that Chinese inspired volatile will be the norm in 2016.
Global markets have been beset with panic and fears about an impending recession or at the least a massive slowdown given the data points investors have got. Crude hitting historic lows, BDI falling below the 400 mark for the first time ever and the continued slide in commodities also flamed the fires.
It took the soothing words of Mario Draghi on Thursday to calm the markets, temporarily at-least.
“It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March,” he said. “There are no limits to how far we’re willing to deploy our instruments.”
But as the central banks cluelessly pump in liquidity the marginal effectiveness will continue to decrease cutting their available options if the global economy was to skid to a halt faster than expected. The central banks are approaching dangerous terrains with ZIRP, NIRP and helicopter drops.

Back to India

2016 was supposed be the year of India as a host of global fund-houses, brokerages and influential investors ranging from Goldman, Nomura, Deutsche Bank, Citi, UBS, Morgan Stanley to influential names such a Bill Gross, Martin Gilbert, Aberdeen AMC, Nouriel Roubini were very upbeat about India’s prospects. But so far signs have been worrying.
Regardless of the benefit of falling crude and commodity prices, a fiscal deficit under control and a inflation still under the RBI’s band of 2-6% India is an integral part of the global economy and when the world sneezes India has to catch a cold.
I believe that in the short term the recent market jitters aren’t not only because of China or the falling oil prices, but this is the markets adjusting to a global environment which is oversupplied and has slack demand. And in such an environment India will continue to suffer. This adjustment could also be a prelude to the deeper malaise being exposed in the global economy that is addicted to easy money as seen by their response to Mario Draghi’s comments.
The remedy is to prop up demand internally which has so far been stubbornly lax except for a few signs here and there. Even Kavinder Singh MD and CEO alluded to the fact in the recent Q3 results “despite the overall weak sentiments in the consumer discretionary space”.
The lack of pickup in consumption can be largely attributed to two failed monsoons and declining agricultural output which has crippled rural demand which in turn has depressed the earnings of FMCG companies. The government is trying to do its bit by front loading a massive amount of budgeted expenditure. By November 2015, 72.3% of the budgeted plan capital spending had been completed, compared to 51% a year ago. But it cannot continue to do so given its shrinking fiscal space.
Analysts are hoping the Seventh Pay Commission increases will provide a shot in the arm for spending.
Exports also paint a worrying picture. India has been hit hard by the global slowdown and December exports contracted 14.75% to $22.3 billion while imports shrank 3.9% to $33.9 billion amounting to a trade deficit of $11.7 billion.
India’s merchandise exports have shrunk 13 consecutive months in a row, partly because of the slowing global demand and structural issues and currency wars.
Dollar value of Indian exports has stagnated around $300 billion for the last four years. More worryingly for the governments intent to reign in deficits, on average, exports were able to finance just two-thirds of imports.
India’s share in world exports has remained in the range of 1.5%, while its share in developing countries’ exports has remained unchanged at 4%. Over the same time China, Vietnam have manged to increase their share in global exports underscoring the weakness in terms of our export competitiveness, currency and the policy makers ability to turn this ship around.
JP Morgan in a note this week said that India’s growth would grow and inflation would remain under 5% over the next two years. It said that consumer discretionary and public capex would support the growth story while subdued global demand would crimp the pace of growth.
“Growth trajectory is showing signs of a recovery led by public capex and discretionary consumer spending, however, the pace of recovery remains slow.
“We believe that headwinds from weak external environment are holding back the pace of recovery,” Morgan Stanley said in a research note.
It also alluded to the positive policy steps of the RBI and that they would ensure India has longer expansionary cycle and would prevent the economy from overheating.
In the same week that JP Morgan came out with this report India’s engineering exports fell by 16 per cent to $5.8 billion in December on the back of slowing demand underscoring the difficulties India is facing in a global environment with too many excesses and very little demand.
Engineering Exports Promotion Council (EEPC) said that going by the current trend, the sector’s exports for the current fiscal would come in much lower than the previous fiscal’s $73 billion.
“A steep depreciation of the yuan will deal a further blow to Indian exports, which are battling a slowdown in most markets of the world, as shipments from the country will further lose competitiveness against Chinese goods,” EEPC added.
This shows the dichotomy between expectations and realities. While global fund houses and mangers have every reason to be optimistic over the India story, micro fundamentals aren’t changing fast enough. The Modi administration has been handicapped by its inability to get major legislations passed and its ignorance towards playing the long game.
True macro fundamentals have put India in a sweet spot but the government is battling multiple threats of shrinking fiscal space, flailing reforms drive, slowing global demand, very low private investments, and stress in the banking sector. By its own admission the govt in its mid year economic review cut the GDP growth forecast to 7-7.5 per cent from 8.1-8.5 per cent. IIP data also was underwhelming in November as it contracted by 3.2%
There have been rising doubts over the ability of the government to conform to the fiscal deficit target of 3.9% this year and 3.5% next fiscal given that the outflow toward meeting OROP obligations and Pay commission hikes. Also the govt has to contend with shortfall in its divestment target having raised less then one fifth of the Rs 68500 crore.
The revenue shortfall the government has to deal with from divestments is expected to be over 50,000 Cr and Rs 30,000-40,000 crore in direct taxes given that slowing GDP growth has hurt tax revenues. This had forced the government to raise excise duty on fuel by four times so far and is considering one more given the downward spiral of crude prices. It is also arm twisting PSU’s into considering share buybacks to mop up additional revenue, given that it is unlikely to meet its divestment target even this year with most of the stake sales being in commodity based companies.
The deficit stood at Rs 4.83 lakh crore, or 87 per cent of the Budget Estimate (BE) for the whole 2015-16. The fiscal situation is, however, better than last year when the deficit was 98.9 per cent of the BE for the same period. But with slowing global growth and domestic policy handicaps the govt has to get its act right soon or risk losing the cushion it got out the fall in commodity prices.
To this extent there were rumors that Pm Modi was considering a rejig of his cabinet by replacing finance minister Arun Jaitley with Piyush Goyal from the power ministry who has done a stellar job so far.
Be what may the Indian govt and policy establishment have to step up in a very gloomy and perilous environment if India hopes to achieve any of its intended targets,

Article by- Bhuvanesh Reddy

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