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.
