 "Devangshu Datta: A desert flower can wilt too")
The old cliches about desert flowers now apply to the Indian economy. Desert flowers attract attention because they bloom in hostile conditions and their survival is against the odds. Desert flowers can also wilt quickly when the environment gets worse.
Global corporate results and macroeconomic data indicate that India is clearly an outlier and outperfomer. But global growth seems to be slowing even more and if things get worse, India will also be dragged down.
In relative terms, Indian companies are doing well. Their counterparts in Europe and Japan are in trouble, while China is slowing down and so is the US. But in absolute terms, India Inc is just seeing mild recovery after three years of stagnation. The latest macro data suggests inflation spiked in April and manufacturing did not grow as fast as hoped for, in 2015-16.
Indian firms have seen some revenue expansion in Q4 and profitability has risen moderately, if we consider the results that have come in. However, not too many companies have released results so far and there are plenty of losers as well among those that have released numbers. So, the picture could change either for the better or for the worse.
At the macroeconomic level, the Index of Industrial Production (IIP) for March 2016 was barely positive, at 0.1 per cent year-on-year growth. Power generation was the sole growth area in March 2016. Manufacturing (which is 75 per cent of the IIP) contracted in March and grew at two per cent through FY2015-16. Cumulative change in the IIP for FY2015-16 over FY 2014-15 stood at 2.4 per cent. Not exactly encouraging since the pace of growth in the IIP slowed from 2.8 per cent in FY2014-15 over that of 2013-14.
The worst aspect of the IIP numbers was that the capital goods segment contracted by 2.9 per cent across the entire fiscal. Capital goods contracted by 15.4 per cent in March. The end-of-year contraction is exaggerated because firms avoid buying in Q4 as they would not receive full-year depreciation. But the fall across the entire fiscal indicates the weakness in the private investment cycle.
Low growth in manufacturing and poor investment demand are both bad news for the banking sector. There are various estimates being made of bad loans. Call it $120 billion or $170 billion or Rs 13 lakh crore. Even the lowest estimates are very large. Bank results indicate that private banks are by no means immune to non-performing assets - it is though the public sector that banks are taking much larger hits. The very fact that Reserve Bank of India (RBI) Governor Raghuram Rajan has had to make assurances that there will not be a "Lehman moment" indicates how messy the situation has become.
Consumer inflation numbers for April 2016 were also depressing. The Consumer Price Index rose by 5.4 per cent year-on-year in April 2016 over that of April 2015, quite a lot higher than the 4.83 year-on-year registered in March.
Rural inflation was higher at 6.1 per cent while urban inflation was at 4.7 per cent. The food component, which contributes close to half the index weight, was up by 6.2 per cent year-on-year. Core inflation, stripped of the volatile food and fuel components, was up to 6.8 per cent year-on-year, according to some estimates. Core inflation indicates stable inflationary trends and we can pretty much assume that the RBI will not be cutting rates again until inflation lowers considerably.
The monsoon assumes overwhelming importance in these circumstances. A good monsoon would mitigate food inflation and trigger rural demand at the same time. A bad monsoon would lead to very high levels of rural distress and a growth slowdown.
In other news, the ongoing state Assembly elections will be parsed for likely changes in the Rajya Sabha where the composition may change in favour of the Bharatiya Janata Party. The passage of the Bankruptcy Bill and the new Real Estate Act has led to some hopes on the policy reform front.
However, the passage of the important Goods and Services Tax (GST) Bill within a meaningful time frame seems unlikely. The GST would have to pass through both Houses latest by September 2016. Otherwise, the Centre will be reluctant to implement it during this Lok Sabha term since it would cause at least a year of initial disruption.
It seems corporate earnings are contracting in Europe. American earnings releases have also been disappointing so far. China has seen an unprecedented number of corporate bond defaults. American gross domestic product (GDP) growth may be slowing down, going by slower employment growth. China's GDP growth is also slowing, going by the latest Purchasing Managers' Indices (PMI). The official PMIs claim marginal expansion while the private PMIs claim contraction. Iran and Saudi Arabia have engaged in a price war on crude exports, which should drive prices down.
In terms of sentiment, India watchers are adjusting to the reworking of the tax treaty with Mauritius. The other news has been fairly confusing as well. Hence, "Mr Market" is behaving indecisively. The technical trend is indeterminate. The Nifty has been meandering around close to its own 200 Day Moving Average. It will need to make a decisive move in one direction or the other to define the long-term trend. Monsoon success or failure, could be the tipping point.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
