India is now one of the riskiest markets to be in, according to CLSA Asia Pacific Markets.
In its weekly economic commentary released today, CLSA said tax revenues were crashing, expenditure exploding as the government in a bid to win the elections had given “full bridle to its populist urges”.
CLSA forecast that the public sector deficit, already 11 per cent of GDP this fiscal year, would rise to 14 per cent in FY09/10. Ten-year bond yields had spiked and the rupee was weakening again.
Pointing out that it was not forecasting an Argentine style debt crisis, the report said not only was the government’s $500 billion infrastructure programme on the back burner, but the spread between private and public sector borrowing costs had widened, which was bad news for private investment spending.
Meanwhile the cyclical growth slowdown is worsening; credit growth is slowing; the manufacturing recession is deepening; job losses are climbing; and non-oil imports are slowing and inflation is falling rapidly belying the underlying weakness of domestic spending.
CLSA forecast 4.6 per cent GDP growth in FY09/10 and expected the domestic economy to stabilise only in early 2010. “We expect the Rupee/US$ to see 57 this year and for interest rates to fall by another 150 basis points from here,”, CLSa said, adding the deluge of bad news out of India had been pretty continuous since the start of the year.
Companies have grown more pessimistic as they have re-assessed the outlook for production, sales, profits, new orders and hiring intentions. The report quotes a Dun & Bradstreet business survey of 77 small and medium scale industries across 17 cities in auto ancillaries and engineering sectors as showing showed that 72 per cent of companies had seen domestic orders decline in 4Q08, with 46 per cent reporting that export orders were down.
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Another 50 per cent expected orders to decline further in the first quarter of the financial year.
Margins are under pressure. 81 per cent had seen margins fall compared with the third quarter of FY 08, as 58 per cent faced with weakening demand were forced to cut prices. The margin squeeze is translating into cost cuts and unemployment. 35 per cent of the companies surveyed had cut headcount while 87 per cent of companies did not plan to increase hiring in the first quarter.
Real consumption spending slowed for the fourth quarter from 6.9 per cent YoY to 5.4 per cent YoY in 4Q08. “We expect consumption to slow through 2Q10 and expect real spending to be growing then by 2.4% YoY. “High frequency spending data in India are rare and far in between so the recent pick up in car sales has created a bit of a flutter among diehard India bulls. We are not fluttered. With job losses mounting, income tax revenues falling, hiring intentions being pared back and consumer sentiment falling, the road ahead is moderation,” CLSA said.
As for rural India, CLSA said its latest survey showed that although the rural sector was benefiting from higher support prices, a weak harvest this year meant it was diminishing returns from here. Again with the property market slumping, rural households are no longer benefiting from rising land prices. A reverse migration of workers from urban areas and the West Asia means that remittance inflows are softening as well putting further pressure on rural consumption.