The lights were a little dimmer this Diwali. Spending is down, with widespread worries about unemployment and inflation. The Bihar Assembly elections saw the Bharatiya Janata Party suffer a stunning defeat with economic repercussions. Macro-economic data was disappointing. Manufacturing growth is low, and retail inflation up.
Globally, the terrorist attack on Paris will mean geopolitical tensions ratchet up. The US Federal Reserve has reaffirmed the possibility of raising the USD Fed Funds policy rate at its meet on December 16. Global growth prospects are "fragile and uneven", according to International Monetary Fund chief Christine Lagarde.
A technical point is worth noting before data are discussed. Deseasonalising near festivals is useful. Holidays mean manufacturing dips. Bonuses mean bulges in consumption. Tourism sees a spike. Hotel and flight occupancy is up, and so on.
This is hard enough to adjust, with fixed periods like Christmas-New Year, where the same periods can be compared across years. It's harder to deseasonalise Hindu and Muslim festivals, which 'wander' because these are tied to the moon.
Diwali last year was on October 23, 2014 and this year on November 11, 2015. The Chinese solve this recurrent problem by clubbing two months together to calculate activity around Chinese New Year. India doesn't do this. So, remember October-November data are unadjusted.
The latest Index of Industrial Production (IIP) is positive at 3.6 per cent change (year-on-year over September 2014). It's lower than expected. September is pre-festival but geared to festival sales. Manufacturing dropped to about 2.6 per cent year-on-year.
IIP will jump in October 2015 because Diwali-Dussehra etc, was in October 2014, lowering activity. But IIP may fall in November 2015 again, for the inverse reasons. However, auto vehicle sales were up in September and October 2015. The heavy commercial vehicle (trucks) did well, suggesting goods traffic is up and that is a good sign.
Inflation data saw the Consumer Price Index in October 2015 run five per cent up, year-on-year. Fuel costs are up, due to higher tax/excise components. Food costs are up. Core inflation, minus food and fuel, is also up. All these are within acceptable parameters. But higher food and fuel costs spark inflationary expectations in households. That could be one reason why gold buying has risen to a quarter of India's import bill. The new gold monetisation scheme is an attempt to get households to move savings into more productive assets. Let's hope it works.
If inflation moves above the Reserve Bank of India's (RBI) expectations in January 2016 (meaning December 2015 data), the RBI may review the wisdom of its four rate cuts in calendar 2015. The rupee is likely to see enhanced volatility, as and when the Fed does hike rates. Next fiscal, the RBI will start repaying/renewing the $30 billion or so it raised in borrowings from non-resident Indians in Q3, 2013-14, when it was protecting the rupee against the end of American Quantitative Expansion III. A fall would be desirable but not via a very jerky process, which could occur.
The central bank will also have its hands full, in guiding commercial banks to manage large non-performing assets. Basel III also looms - how will the government recapitalise the public sector undertaking banks to meet those new norms? The answers will be interesting for the market. Given the parlous state of the banking system, predictions of gross domestic product growth at over seven per cent do look a little unrealistic.
The Bihar elections also offer several negative takeaways. First, the lack of BJP numbers in the Rajya Sabha will persist and an energised Opposition will be obstructive. Hence, it is unlikely that substantive legislation can be passed.
This means no visibility on the Goods and Services Tax (GST). If the GST Bill is not passed and implemented by 2016-17, it is not likely to be implemented before the next general elections in 2019. No ruling party would be courageous (or foolhardy) enough, to go into an election with a GST implementation in the last two fiscals of its term.
The communally charged Bihar election campaign also made overseas investors review India exposure and it may have spooked some of them. There were multiple advisories and edits in the overseas financial press on the subject. More of the same divisive campaigning style can be expected, with Assembly elections due in Assam, West Bengal and Uttar Pradesh, all states with large minority populations.
Foreign portfolio investors (FPI) have been net sellers of Rs 11, 281 crore of equity in 2015-16 (April 1, 2015-November 14, 2015) and they have bought Rs 12,280 crore of debt in the same period. The equity sales have been a dampener for stocks. The Nifty is down about seven per cent since November 2014. FMCG, pharma and automobiles are the only three sectors with nominally positive returns. No sector matched the fixed deposit rates or treasury yields.
Given poor corporate earnings in Q2, 2015-16, and the "fragile and uneven" projection mentioned above, selling could well continue. Technically speaking, the charts look quite bearish. This implies that the 52-week lows registered in September (Nifty 7,539; Sensex 24,833) could be tested and broken.
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
