From economic “miracle” to soft patch.

Insights and Market Perspectives

Author: Regina Chi

September 13, 2019

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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.

Structural issues

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.

Investment opportunities

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.

The commentaries contained herein are
provided as a general source of information based on information available as
of September 5, 2019 and should not be considered as investment advice or an
offer or solicitations to buy and/or sell securities. Every effort has been
made to ensure accuracy in these commentaries at the time of publication
however, accuracy cannot be guaranteed. Investors are expected to obtain
professional investment advice.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

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