Wednesday, December 23, 2015

Investment Strategy 2016-5: Investment, savings & consumption

"Religion and art spring from the same root and are close kin. Economics and art are strangers."
—Nathaniel Hawthorne (American, 1804-1864)
Word for the day
Schmooz (v)
To seduce with flattery
(Source: Dictionary.com)
Malice towards none
Ratan Tata is losing his heart to UP!
Does it mean Gujarat is also losing to UP?
First random thought this morning
The chill in Delhi's air is rising forcing people indoors early in the evenings. The Winter session of the Parliament is ending today.
The government has two months, before the Budget session begins, to set its house in order, sort out priorities, work out floor strategies, reach out to opposition and showcase its achievements. Alternatively, it could escalate confrontations and vitiate the environment further.
Either way, no winter vacations for the government!

Investment Strategy 2016-5: Investment, savings & consumption

Private investment & consumption, public spending and exports are four primary drivers of economic growth of any nation.
·         Private consumption is in turn a function of private income and borrowing.
·         Private investment is a direct function of domestic consumption and export demand and is materially influenced by credit conditions.
·         The government spending is a function of private income & consumption (direct & indirect taxes) and government borrowing.
·         Exports in simplistic terms a function of global demand and relative terms of trade.
In simple terms, the price performance of various economic assets primarily depend on economic growth and liquidity (demand-supply equilibrium), I find it easy to portend as follows:
(a)   Private consumption has remained sluggish for past couple of years, led by decline in rural income. Real urban consumption has also been under pressure due to persistently higher consumer inflation. 2016 may see partial reversal in this trend, assuming CPI remains under control, El Nino recedes and we have a normal monsoon after two years, and pay commission and OROP disbursements find their way to markets.
Rising income may also see growth in consumer borrowings. Though the household balance sheets have seen rising leverage in past one year, still there is scope for further leveraging, in my view.
However, there is little to suggest that things will improve in 1H2016. So this kicker will come only in later part of the year.
(b)   Given that presently capacity utilization in Indian industry is low, balance sheets of corporates are highly leveraged, export demand is decelerating and real rates are rising, the environment for domestic private investment is expected to remain challenging for better part of 2016. However, a material easing in FDI norms and administrative efficiency in managing foreign investments could support gross private investment. Again do not expect material improvement in 1H2016.
(c)    Current equity market conditions (little divestment potential), high real rates (expensive borrowing and debt servicing for government), likely lower growth in indirect taxes, and desire to maintain fiscal discipline do not augur well for material pick up in public spending as well. As it appears today, only a global collapse will only spur government stimuli.
(d)   As discussed yesterday, the global growth, especially in major trade partners of India (except US) is not likely be encouraging. So no material improvement expected at export front. In fact, a serious CNY devaluation (not unlikely) could hamper exports further.
Also Read

No comments:

Post a Comment