The official reaction to the 1QFY14 economic growth data was
on expected lines – little disappointment and lots of hope. Chairmen of
planning commission and PMEAC both exuded confidence that 2HFY14 will be much
better and the growth for full year will top 5%.
After travelling across the country this summer and meeting
thousands of people from all walks of life we observed that economic activity
is slowing considerably and current growth is more likely to be closer to 4%
rather than 5% as hoped. (e.g., see here).
Given the environment of complete mistrust and suspicion, we
are not sure how many people actually share the hope of the government.
Nonetheless, it would be pertinent to consider the following before any
investment strategy is constructed based on hope of revival.
By now almost everyone has admitted that there is little
evidence of any recovery in 2QFY14. With manufacturing continuing to decelerate
overall industry segment is most likely to report negative growth in 2Q.
Widespread floods, liquidity squeeze, import curbs, and multiple hikes in fuel
prices etc. have certainly further slowed down construction, transportation,
trade and finance activities in the country in 2Q. The services sector growth
is more likely to slow down to 5.5% this quarter.
Agriculture growth may be better on a lower base of a
draught year, but not more than 4% due to floods.
With this maths, 2QFY14 real growth should be closer to or below
4%.
But the problem of investors is not 1HFY14 deceleration in
growth. The real problem is that there is little hope for any improvement in
next three quarters at least.
The highest contribution to 1QFY14 growth has been from
public sector spending. With the government having already spent two third of
its targeted deficit there is little help expected from this source. Liquidity
squeeze, higher interest rates, higher fuel prices and import curbs shall
certainly impact the private consumption.
Model code of conduct coming into effect before elections
and thus curbing government spending shall also have its impact. (Usually, a
quarter before election has seen slower growth due to spending curbs and lower
investment).
The liquidity event in US (tapering) and geo-political event
in Middle East shall also have their full impact over next 2-3 quarters. In our
view, this should logically reflect in higher rates, weaker INR, higher
inflation (especially energy prices), higher import curbs, lower consumption, saving
and investment.
The next government will hopefully take charge in May 2014
and present budget in July 2014. Any pick up in economic activity therefore
should be expected only from 2QFY15 at the earliest.
Besides, if the new Land Law comes into effect this year,
most new projects might be delayed by at least one year. So keep your hopes
alive, but preserve your capital.
Thought for the day
“Between two evils, I always pick the one I never tried before.”
- Mae West (1893-1980 )
Word of the day
Bulbous (adj)
Bulb shaped, bulging
(Source: Dictionary.com)
Shri Nārada Uvāca
By conceding to the undue pressure of political bosses, has RBI governor undermined the financial security of the country?
No comments:
Post a Comment