Present disappointing, future tense

Alongside the monetary policy statement, the RBI released the results of few forward looking surveys. The surveys, especially the consumer confidence survey, highlight the despondency prevailing in the economy. These surveys totally belie the apologetic 25bps repo rate cut and argue for a "significant" policy intervention.

1.         Consumer confidence survey

(i)    Consumer confidence weakened in September with both the current situation index (CSI) and the future expectations index (FEI) recording declines.

(ii)   Households’ sentiments on the general economic situation and the employment scenario declined further, and they were less optimistic on their income over the year ahead than in July 2019.

(iii)  Respondents perceived an increase in the price level over the last one year and a majority of them expect prices to rise further in the coming year; as a result, sentiments on overall spending as well as essential spending remain strong, though sentiments on discretionary spending weakened.

 

2.         Survey of Professional Forecasters on Macroeconomic Indicators

Growth is expected to moderate in 2019-20 but improve in 2020-21. Consumer price inflation is expected to remain at or below 4.0 per cent till Q2:2020-21.

3.         Industrial Outlook Survey of the Manufacturing Sector for Q2:2019-20

(i)    Respondents assessed that there was a slump in order inflows, output and employment conditions in Q2:2019-20.

(ii)   On exports and imports, there was waning optimism in Q2:2019-20.

(iii)  Sentiments on the overall financial situation reflected lower optimism on availability of finance from internal accruals, bank finance and overseas sources in Q2:2019-20.

(iv)   Cost pressures emanating from interest payments on borrowings, purchase of raw materials and salary expenses were assessed to have softened in Q2:2019-20, but manufacturers were pessimistic about profit margins in view of slack demand and negative sentiments on selling prices.

(v)    The Business Assessment Index (BAI) fell sharply to 92.5 in Q2:2019-20 from 108.4 in Q1:2019-20.

 

4.         Order Books, Inventories and Capacity Utilisation Survey on the Mfg sec – Q1FY20

(i)    Capacity Utilisation (CU): At the aggregate level, CU declined to 73.6 per cent in Q1:2019-20 from 76.1 percent in Q4:2018-19, broadly tracking the de-trended index of industrial production (IIP) (Chart 1). Seasonally adjusted, CU increased by 0.3 percentage points to 74.8 per cent in Q1:2019-20.

(ii)   Order Books: Fewer new orders were received in Q1:2019-20, marking the third successive quarter of decline in new orders.

(iii)  Finished Goods Inventory (FGI) to Sales Ratio: The FGI to sales ratio rose for the second consecutive quarter in Q1:2019-20, mainly reflecting moderation in sales as FGI remained unchanged from the preceding quarter’s level.

(iv)   Raw Material Inventory (RMI) to Sales Ratio: The rise in RMI to sales ratio was on account of increase in inventories and moderation in sales.

Sentiment watch

Last weekend I had an opportunity to address a gathering of stock market intermediaries. The interface provided some useful insights which I find pertinent to share with the readers.

All the participants deal with small and medium sized household investors and traders, commonly referred to as the Retail Investors. The common refrain was that the recent stock market rally has not benefitted the retail investors. Most of these investors are stuck with the struggling mid and small cap momentum stocks which are down anywhere between 25%-75% from their cost of acquisition and no hope of recovery.

To make the matter worst, many of their active clients are still looking to buy the fallen angels, the stocks where the equity value is negligible or even negative in some cases. Most popular stocks with this segment are stock of JPA group, ADAG Group, Jet Air, DHFL etc.

Tata Motors, SAIL, Nalco, Coal India and Yes Bank are some of the stocks which have perhaps disappointed the largest number of retail investors.

The investors' sentiment has improved marginally post the restructuring of corporate tax rates announced by the government. However, most of them remain skeptic about the sustainability of the current up move. There appears to be a widespread expectation that the budget for FY21 will contain provisions for restructuring of the personal income tax rates also.

The feedback about the business sentiments was scanty. Nonetheless, there appears to be some improvement in business sentiments. Most of the people would however like to wait for supplementary announcements like rate cuts, easier credit terms and government spending etc.

The two key concerns of the participants were:

1.    Will the promoter be encouraged by new tax provisions and set up new units as private entities, rather than investing in the growth of the existing listed entities?

2.    How the government will manage the fiscal deficit post the rate cuts, especially when the GST shortfall is also going to be much higher than anticipated? Will higher deficit constrain RBI in cutting the rates further? and Will the government investment in infrastructure be pushed back by couple of years due to revenue shortfall?

My take on these concerns is as follows:

Fresh capex

In my view, the first concern may not be valid for the businesses owned by Indian promoters and/or investors. For, many of the Indian businesses (e.g., in cement, power, chemicaal, steel, auto sectors) have either done material capex in recent past or are running at poor capacity utilization and do not need to do invest in fresh capacity in near term.

Insofar as the foreign companies are concerned, many of them like Maruti, Bosch, Siemens, Cummins, and Schneider etc have been investing outside the listed entity for past many years. This trend may continue or even accelerate. The consumer MNCs like Colgate, HUL etc do not need to do much capex in near future at least.

Fiscal deficit

The relationship between the investors and the fiscal deficit is akin to the proverbial Mother in Law and Daughter in Law relationship. No matter what, the investors can never be fully satisfied with the fiscal conditions.

We have seen much worse fiscal conditions in past 3 decades. The point that is often ignored in comparison with global economies is that so far the fiscal deficit in India is still funded by the savers, mostly from middle and lower middle class. In fact, in past 4years the reliance in small savings to fund the fiscal deficit has risen considerably.

Historically, the governments have been managing the fiscal burden through maintaining the interest rates on savings in negative territory (deposit rates being equal to or lower than consumer inflation). In recent times the real rates have become hugely positive and there is lot of leverage there to cut rates and fund the fiscal deficit easily with no critical impact on the overall fiscal conditions.

Moreover, we are likely to see an aggressive disinvestment program in next 12-18months that shall compensate for some of the revenue shortfall. 5G auction in FY21 should also be supportive. However, if the rates are not cut meaningfully (or inflation does not rise meaningfully) in next couple of years, FY22 onwards we may see pressure on the fiscal conditions.

The key monitorable here is the private savings rate that has been declining consistently in past one decade despite very high real rates in recent years. If tax cuts can result in higher corporate savings, it would be good sign for the economy.

Remember the gamble the government has taken is that private investment will accelerate to compensate for the poor growth in public investment. If this bet fails in next 2-3years, we shall have a serious problem at our hand.

India's foreign trade at critical threshold

The foreign trade of India is presently standing at a critical threshold. A successful crossover will open abundant opportunities, while a failure will close many more doors.

Before looking at the opportunity, it is pertinent to note the current state of affairs of our foreign trade.

The broader picture of India's foreign trade could be summarized as follows:

(a)   India's total exports have mostly ranged between $25bn and $30bn per month since 2011.

(b)   India's total imports have mostly ranged between $35bn and $45bn per month since 2011.

(c)    India's trade balance has consistently worsened since 2004, and is mostly ranging between $10bn and $15bn since 2011.

(d)   India's non oil trade balance has worsened materially since 2004 and stands close to $100bn per annum.

(e)    India's foreign trade growth has consistently lagged the overall GDP Growth since 2012.

 

 

It is also important to note that the external trade profile of India has seen material transformation in past one decade. Imports have been moving away from traditional oil & gold domination; and exports have diversified away from traditional consumer goods like textile, gens & jewelry, leather etc. The share of manufactured engineering goods has been rising in the total export revenue. Electronics has become a major import item.

With many global leaders like Samsung, MI, Apple, LG, etc. deciding to produce in India; new biofuel policy raising the ethanol blending to 10% in transportation fuel; massive investments in renewable beginning to yield results; electric mobility becoming a viable option in next 10years; and various productivity enhancement missions in pulses and oilseeds achieving targets, we may see a further shift in India's import profile going forward.

Moreover, shifting away from colonial (cheap labor and material source) model, India is also becoming a research and development (R&D) hub for global manufacturers and service providers.

It is widely accepted view that foreign trade, especially exports, could be the most potent source of generating incremental employment opportunities that would catapult Indian economy to a higher growth orbit.

I am therefore viewing the current restructuring of corporate tax rates (see here) as a measure to boost the export economy rather than supporting the domestic consumption demand.

It is important to assimilate that viewing the current developments only as a measure of shift from China due to geo political or tariff reasons would be a mistake. The foreign trade growth will primarily be a outcome of massive investment made in infrastructure development over past 20yrs. We have paid huge cost of this massive infrastructure building drive in terms of crippling of financial sectors due to NPA problem, episodes of massive corruption leading to paralysis of policy administration and disruptions in markets place due to large scale bankruptcies.

But it is also a fact that a high quality capacities terms power generation, ports, road network, railways, civil aviation, financial services, telecommunication, manufacturing, and GSTN have been created and/or shall be put in place in next 2-4yrs. This infrastructure surplus will be the primary driver of India's foreign trade (and trade balance), job creation and socio-economic transition.