Infrastructure-related stocks are on everybody's radar. The danger is over-valuation
The wholesale price index turning negative in June was not a surprise. The WPI is computed on the basis of point-to-point (P2P) changes. A base effect was bound to come into play. Crude was trading at twice the current price a year ago. The WPI rose until September 2008 so it's quite possible the P2P will stay negative for months.
The consumer price indices were all running above the 8 per cent mark in April 2009 when data was last released. That implies demand hasn't completely disappeared. In fact, the WPI time series hit its 2009 highs in June. Ditto the CPI, up about 14 per cent in April, compared to December 2008.
Coupled to a small recovery in the IIP, it seems demand is picking up. Growth must have bottomed in the third and fourth quarters and the market rally is a leading indicator of a real economic recovery. But the market has run up too far, too fast. Budget expectations are too high for comfort.
If Pranab-babu fails to deliver, the market could go through a burst of serious selling. There are a couple of reasons why the Budget could be a damp squib. One is lack of time to prepare a big bang. The other is genuine reluctance about reforms inside the Congress. Most probably, the Budget will involve minor tinkering. Big bangs, if any, are likely to be left for February 2010.
Matters on the disinvestment front could proceed with more enthusiasm since IPO proceeds would help balance a massive fiscal deficit. A couple of decent PSU issues might also kick-start a recovery in the overall IPO market.
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To understand how much damage the recession has caused isn't going to be easy. One angle worth examining is goods movements. The Indian Railways carries roughly 40 per cent of domestic freight volume. Between 2005-06 and 2007-08, rail freight volumes grew at over 10 per cent per annum. In the second half of 2008-09, freight volume growth dropped to 5 percent. Railway Budget projections for the current fiscal suggest freight volumes will grow around 7-8 per cent.
Indian ports, which handle over 90 per cent of India's overseas trade by volume, had cargo volume CAGR of above 10 per cent between 2003-04 and 2007-08. Last fiscal, cargo volume growth dropped below 4 per cent. This was good given the global situation. Trans-shipment hubs like Singapore and Colombo saw double-digit cargo volume reduction. But Eleventh Plan targets of marine cargo CAGR at 10 per cent (2007-08 to 2011-12) are very unlikely to be met. Civil aviation did see actual declines in cargo and passenger traffic.
Empirical observation suggests goods volume growth rates exceed GDP growth rates by a significant factor in an economy like India. If this held true in the second half of 2008-09, GDP growth dipped below 4 per cent in those six months.
If this holds true in 2009-10, GDP growth is unlikely to be higher than 5.5 per cent, which is the lower end of goods volume growth estimates. GDP is in fact, very likely to be lower than 5 per cent.
That slowdown is going to hurt at a lot of levels. Consumer demand is unlikely to spike in circumstances where there were layoffs in 2008-09 and there will be few pay hikes this year. It also means offtake for commodities like steel and concrete will remain muted because the housing industry for one, will be in recession. .
The government fiscal stimulus packages have helped. But it will have to pump in a great deal more in the way of investment to boost the economy. The need to kickstart big ticket spending on infrastructure is exceedingly acute.
Ironically, India could attract a larger share of FDI and FII in a year when it will deliver muted economic performance. This is because it will stand out as a "desert flower" when most national economies are struggling to generate any growth whatsoever. But it does need enabling policy.
None of this is rocket science. Macro-economics rarely is. But it does mean that infrastructure related stocks are going to be in everybody's gun-sights. The danger will be over-valuation. With luck, the Budget will trigger enough of a correction.