Dear Reader,
The government’s advance estimate of real GDP growth for the current fiscal year, at 9.2 percent, is below the RBI and IMF forecasts of 9.5 percent. The press release shows they have taken data up to November in most sectors, while the industrial production numbers are up to October. This data would have been extrapolated for the entire fiscal year, which means growth may be even lower if the third wave has a significant economic impact.
The biggest takeaway from the advance estimates is the weakness in private consumption. For the second half of FY22, the growth in private consumption is expected to be a mere 1.8 percent. Compared to the second half of FY20, growth in private consumption is just 1.7 percent. It’s an indication of a K-shaped recovery, where large sections of the population have been badly scarred by the pandemic.
Government consumption spending is estimated to grow a strong 13.9 percent in the second half of FY22, while government capex will also be driving a sizable 6.1 percent rise in gross capital formation. Real GDP growth for the second half is 5.6 percent.
The data suggest the government should continue to spend liberally in the next fiscal year, as some parts of the economy need support. In fact, the growth estimate for the construction sector, a big source of jobs for the masses, is marginally negative for the second half.
With nominal GDP growth expected at 17.6 percent compared to 14.4 percent growth expected in the budget estimates, the fiscal deficit as a percentage of GDP will look low. That should give the government leeway to keep spending.
Our economic recovery tracker too has been showing mixed results, with the consumption picture not looking good, as evident from the auto sales numbers. Marico’s volume growth was hit because of a slowdown in consumption and higher inflation. There were, however, early signs of easing chip constraints.
Nevertheless, the PMI data show a strong recovery for the Indian corporate sector in the December 2021 quarter, a view echoed by analysts on the Q3 results. Rising truck rentals are indicating a sustained recovery in the commercial vehicles sector, while tyre makers are going in for capital expenditure, underscoring robust demand. The central government has plenty of headroom to spend in the current quarter, bolstering the economy.
This week, we considered whether it would be worth adding the following stocks to investors’ portfolios on market weakness: Titan, Laurus Labs, Sharda Cropchem, Gail India, LIC Housing Finance, Venky’s, Godrej Consumer Products and NTPC. CSB Bank was our weekly tactical pick.
But it’s clear there are risks to growth. The rising demand for work under the rural employment programme is an indicator of distress at the bottom of the pyramid and there are many hurdles ahead as India embarks on a new business cycle. Electricity demand and generation has moderated, putting a question mark on coal demand.
Much depends on the third wave of the pandemic. The consensus is it’s a mild though highly transmissible variant and that it will peak soon, as seen from the South African experience. Moreover, the authorities have been reluctant to impose lockdowns and the Oxford Stringency index for India was at 59.72 on January 3rd, 2022, well below the reading of 81.94 seen between May to July last year, when the second wave hit. That is why the market has ignored Omicron.
But our Herd Immunity Tracker warns that the sheer number of people affected will be large. It points to the US, where the number of hospital admissions is now similar to that seen during earlier waves.
A report from Nomura says, ‘if daily cases….peak at the same level as in South Africa (per million population), then new cases could rise as high as 740k in India.’ Further, ‘if cases rise as high as in the US currently (per million population), then new daily cases could rise as high as nearly 3mn in India.’
In short, there are plenty of risks ahead. Ruchir Sharma, Morgan Stanley Investment Management’s chief global strategist, outlined ten trends investors must be aware of in 2022. This FT piece (free to read for MC Pro subscribers), points to rising risks in some ETFs.
Also among the risks is the disruption being caused by new technologies and new business models. For instance, a key moat for FMCG businesses is now under threat. The digital revolution and covid are set to transform urban India–Indiamart Intermesh could be a beneficiary. In the EV space, we believe Sona BLW Precision Forgings could be a proxy to ride its growth. The 3Vs—video, voice and vernacular, are going to be significant drivers of value accretion, throwing up new investment opportunities. Artificial Intelligence will be deeply embedded in the financial sector—indeed, there’s a tsunami of innovations being unleashed in banking, throwing up new winners and losers. The Open Network for Digital Commerce will pose a challenge to the likes of Amazon. What’s more, many venture capital and private equity firms have amassed war chests of cash waiting to be deployed in new, fast-growing firms.
Another concern, of course, is of rising interest rates. On the inflation front, a decline in global food prices is a piece of good news, but higher gas prices are a problem. In the US, the CME Fedwatch Tool shows that the probability of the US Fed Funds rate rising as early as March is around 68 percent. The Fed minutes, released this week, showed some members pushing for faster tapering and rate hikes.
As usual, we had new articles on crypto and personal finance. In our Algo Rhythm section, we had a piece telling investors how to set up their own algo trading systems.
Another big worry is China, especially the crackdown on real estate companies there, this FT story argues. But could China’s economic slowdown be deliberate, as The Eastern Window tells us? There’s also the geopolitical threat and we had a story this week on China’s military, which has used the pandemic to win friends and expand its global footprint.
While risks are rising, at least corporate India is entering this tricky terrain from a position of relative strength. The JP Morgan Global Composite PMI report said that while global growth slowed to a 3-month low at the end of 2021, ‘The US recorded the strongest performance overall, followed by Ireland and then India.’
Stay safe,
Manas Chakravarty
