Economic growth may see shallow recovery in FY15

Industrial recovery, general elections and a pick-up in developed economies will aid recovery in growth but a secular bull run is unlikely

After many faulty forecasts of a revival in earnings and economic growth, most market pundits went silent in the second half of 2013. Other than the election-related exuberance, there’s little to write home. While there is no consensus yet, a handful of strategists and economists are betting on economic growth picking up in FY15, even if it’s going to be a shallow and modest recovery.

Given that elections are scheduled for the middle of calendar year 2014, growth would possibly remain subdued in the first six months of 2014. Despite this, economic growth is expected to pick up from 4.6 per cent in the first half of FY14 to 4.8 per cent. Ritika Mankar Mukherjee of Ambit Capital believes growth normalisation will begin in FY15, which will largely be driven by a pick-up in the industrial sector and a minor improvement in the services sector. Ambit expects India’s gross domestic product (GDP) growth to expand by 5.1 per cent in FY15. However, if Narendra Modi actually becomes Prime Minister, economic growth could accelerate to 5.6 per cent, as the brokerage believes Modi’s leadership could only ‘add to India’s natural growth rate’.

Another positive the optimists are factoring in is the genuine pick-up in economic growth in the developed world, especially the US. This pick-up is unlikely to be impacted by the fiscal tightening and tapering of the US quantitative easing programme. This would continue to benefit India's export-oriented companies. Ambit expects Sensex earnings for FY15 to be Rs 1,243, assuming a five per cent year-on-year growth.

  Even though most of the market participants are writing off FY14, a shallow improvement is being factored in for the second half of the current financial year, largely on the back of improved export performance, high fiscal spending, election-related spending, retail lending by banks and improved financial market conditions. Emkay Global's Dhananjay Sinha expects FY15 GDP growth at five per cent, emanating from a combination of strengthening US economy and withdrawal symptoms of rebalancing domestic adjustments.

However, the exuberance of a bull run resembling 2004-05 is stretching things a bit. With the current one year forward multiple of the Sensex at 15x and GDP growth at 4.8 per cent levels, expecting a secular bull run is reflective of irrational exuberance. While FY15 might not be as much of a washout as FY14, it's not looking like a great year either.