3QFY20 GDP growth - Worrisome

The recently released data of country's economic growth once again highlighted that the current slowdown may not be entirely cyclical and it may have some element of structural weakness in the economy. In particular, the continued weakness in investment activities is worrisome. Also, sharp fall in nominal growth and poor growth in per capita income does not augur well for the midterm growth prospects. The latest PMI and employment data for February indicates that the slowdown continues in the current quarter also.

The second advance estimate for FY20 GDP growth is now 5% (vs. 6.1% in FY19). Per capita GDP is now expected to grow at 3.9% in FY20 (vs 5.1% in FY19).

In the reporting quarter (3QFY20)—

• The production of coal (-4.3% yoy), Crude oil (-6.2% yoy), Natural Gas (-6.6%, yoy), and Commercial vehicles (-17.3%, yoy) recorded significant contraction.
• Overall manufacturing activities contracted 0.3% yoy.
• The private consumption at 62.4% of GDP in 3QFY20 was highest in recent years, while the investment at 26.1% of GDP was lowest in recent years.
• Railways (-4.7% yoy) and air cargo (-7.2% yoy) recorded negative growth, while marine cargo recorded a nominal growth of 0.1%.
• The Consumer Price Index (CPI) was higher by 5.8% yoy, while Wholesale Price Index (WPI) was higher by 1% yoy. Consequently, the nominal growth for the quarter was also lower at 7.7%. As per the latest official estimates, nominal GDP is expected to grow @ 7.5% in FY20 (vs 11% in FY19). This is a massive one third fall in nominal GDP growth. Per capita nominal GDP growth for FY20 is now estimated at 6.3% (vs 9.9% in FY19).

It is pertinent to note that the finance minister assumed over 10% nominal growth for FY21 in her budget assumptions, which is massive 30% growth from 3QFY20 level. The nominal GDP is important because the household disposable income, corporate profitability and government tax revenue are directly affected by the nominal GDP growth.

• The foreign trade recorded sharp deceleration. The share of imports in GDP has contracted to 21.9% in 9MFY20, (vs 24.9% in 9MFY19), while exports in the same period decelerated to 19.6% from 20.9%.
• Agriculture sector GDP growth of 3.5% (yoy) during 3QFY20 is a relief. This marked third straight sequential growth for farm sector. However, considering very low base (2% in 3QFY19), it may be little early to celebrate the end of rural stress.
• The nominal growth of 13.7% in farm sector (vs 2.3% in 3QFY19) was even more encouraging.
• The population growth trend was declining since FY14. However from the current year FY20 this trend is estimated to have reversed as the population is forecast to rise to 1.341bn by March 2020 against 1.327bn a year ago, registering a growth of 1.1% (vs 1% in the previous year). This explains faster deterioration in per capita numbers of GDP.
• The bank deposit growth has accelerated in FY20 from last year. The deposits grew 9.8% in 9MFY20 (vs 7.9% in 9MFY19). The bank credit however declined materially in this period from 12.4% in 9MFY19 to 9.2% in 9MFY20.

In 3QFY20 particularly, bank credit declined to 7% (vs 13.9% in 3QFY19), while deposits grew 9.7% (vs 8.9% in 3QFY19). This is a rather worrisome trend from bank profitability as well as over GDP growth perspective.

Lower crude prices not necessarily good for economy and markets

In past few days many market experts have highlighted that the recent fall in crude prices is a major positive for Indian economy. Through my interactions with some investors I learned that many investors do take the publically expressed random opinions of these experts quite seriously and actually base their decisions on these.

Besides, small investors are also usually seen following the actions large celebrity investors. Even in recent past, there have been many instances where small investors have emulated the actions of large investor buying a meaningful stake in a stressed asset.

From the regulatory standpoint there is no violation in both these cases. The market experts are free to publically express their opinions and views about the market trends and events. The companies, stock exchanges and investors are in fact obligated to make public disclosure of large secondary market deals. But there could be an ethical lacuna in these practices.

For example, one reputed fund manager, who presently runs an investment management and advisory firm and had been CIO of one of the top AMCs in the country, recently tweeted "$40 for crude in 2020 coming soon. Big positive for India!"

Obviously he made this assertion in zest and may not have any particular design in mind while writing this tweet at midnight. However, his numerous followers may find it an "advice" and accordingly act upon it.

It would therefore be better if the "experts" had also highlight that crude prices usually have positive correlation with India's GDP growth. In past 20yrs, all three episodes of sharp rise in crude prices have resulted in rising trend in India's GDP growth rate, and vice versa.

• 2004-2007: Brent Crude prices jumped from under $30/bbl to over $140/bbl. In this period India's GDP growth accelerated from about 3% (FY03) to 9.5% (FY08).
• 2010-2012: Brent crude prices again jumped from $40/bbl to $$120/bbl. In this period, India's GDP growth improved from 5.5% in FY13 to 8.25% in FY12.
• 2016-2017: Brent crude prices jumped from below $30/bbl to over $80/bbl. In this period also India's GDP growth improved from 7.5% in FY15 to 7.75% in FY17.
  It would be pertinent to note that crude prices fall in response to demand slowdown. A fall in crude prices has not particularly shown to be pushing the growth higher. Besides, the Indian markets have not shown any significant correlation with the rude prices in the past.
  Lower crude prices hurt many businesses like oil & gas producers and oil marketing companies.
  Lower crude prices hurt state revenues (excise and customs) which are ad valorem to crude prices. Since the fuel pricing is not market driven and subsidies have been virtually eliminated, the offsetting positive impact on fiscal in form of lower subsidies is no longer available.
  Moreover, if the crude prices are falling due to demand slowdown, the benefit to the consumer industries is limited as they are not able to increase production at lower cost. So lower crude prices may help in protecting margins to some extent during the demand slowdown period, but may not necessarily result in higher profits.
  It may be noted that sharp fall in crude prices in 2008-09 and 2014-16 did not result in any major gains for Indian stock markets.