Vijay Kumar Gaba

 A literal interpretation of the latest statistics would indicate that Indian economy is passing through a recession and faces a specter of stagflation. A young demography like India can certainly not afford this condition.

The government officials have termed the recession as a “technical” one, induced temporarily by the total lockdown imposed in the wake of the outbreak of Covid-19 pandemic. The economic managers of the government have also vehemently denied any possibility of Indian economy slipping into a stagflationary trap.

In my view, however, this entire discussion based on official statistics might be “technical” in nature. Wandering through the streets of large cities and fields in the hinterlands over past few months, and interacting with people from various strata of the society, I am convinced that more than two third of Indian population may already be trapped in the stagflationary conditions, with their real income stagnant or declining over past few years and essential expenses rising. The economic and health shock of pandemic may have only accelerated the trend of deterioration.

Another noteworthy thing in the official narrative is that an attempt is being made to establish as desirable base for the future growth paradigm. This sounds unfortunate, as the pre March 2020 situation was worrisome and far from desirable state of economic growth. Therefore, in my view this “V shape recovery to pre March 2020 level” narrative is also ironical and redundant.

Nonetheless, as we approach end of calendar year 2020, it is useful to look at the latest economic trends; draw estimates for the next year and see if any changes are required in the investment strategy and investment portfolio.

I find the following economic trend worth noting. I shall continue to keep a close watch on these trends for my investment strategy purposes.

1.    The long term growth trend (5yr CAGR of Real GDP) of India’s GDP peaked in FY08 and has been declining since then. Even normalized for the sharp deceleration in pandemic affected FY21, the long term growth shall remain below 6% for next 3years at least. Success of recent stimulus program for promoting manufacturing and agriculture growth may add 50 to 75bps to India GDP by FY23. Even then the long term growth trajectory shall remain below the 9% rate desired to create enough employment for the fast increasing workforce of India.

2.    India’s savings rate, especially household savings rate, has been declining consistently for past 10years. On the other hand, the household indebtedness is on the rise. Historically, the domestic savings have supported both the public finances and private investments. Lower savings is making the growth and social sector spending more dependent on foreign capital. Nothing inherently wrong in borrowing from overseas; but it increases the external vulnerability, especially in the periods of crisis. The global monetary conditions indicate that the crisis may be more “norm” than “exceptions” in next decade. Obviously, a further deterioration in domestic savings will make us more vulnerable to global volatility.

3.    The export growth of India has been dismal in past decade. The stagnating exports in fact have been one of the primary factor behind declining growth trend in India. The government has apparently taken cognizance of this fact and taken a slew of measures to promote exports. I shall be keenly watching if these measures result in meaningful and sustainable acceleration in exports, especially manufactured exports, from India.

4.    After peaking in 2018, the non-performing assets in the Indian financial systems had shown encouraging trend in past two years. I shall be keenly watching the trend in NPA, once the relaxations given as part of support to businesses in post lockdown period end next year. A sharp rise in NPA level again would seriously impact the mid term growth prospects of the economy.

5.    The household and corporate investment in fixed assets has deteriorated in past decade. If the prevalent low interest rates fail to revive the investments in next couple of years, the mid-term growth potential of Indian economy could be seriously impacted. I shall be watching the revival of investment, which most analysts are expecting to happen in 2021.

6.    The real rates have remained negative for past many months now. It is estimated that the policy rates may have bottomed, and remain at present levels for most of 2021. This shall keep the real rates negative for 2021 also. I shall watch for any violation of this premise. The real rates turning positive may trigger a rise in short term rate and reallocation of assets.

7.    The tax collections have seen sharp decline in FY21. If the normalcy in tax collections is not restored in 2021, we shall see (i) material decline in government expenditure 9which has supported the growth revival so far); (ii) rise in effective tax rate; or (iii) both.

8.    Excess liquidity in the financial system has made the policy rates redundant in the near term. This situation cannot last for longer. Unless we see sharp acceleration in credit demand, RBI may be forced to change its “accommodative” policy stance. This may be negative for equities in the short term.