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This December is slightly different from the previous two years. Since the economy hit an air pocket in 2011, market gurus have consistently predicted that a recovery was merely two quarters away. This year-end, nobody is saying any such thing. The markets entered 2013 with expectations of a recovery in economic growth from the second half of FY14, driven largely by election spending rush. Also, the Reserve Bank of India (RBI) was expected to continue cutting rats through the year, which was expected to help corporate earnings and kick-start investments, too. In trade parlance, the events that actually played were not “in line” with expectations of the pundits and economists. Economic growth fell to an all-time low of 4.4 per cent in the April to June quarter and the currency went into a tailspin, dropping 11 per cent alone between July and September.
Can it get worse? Once again, if the pundits are to be believed, it cannot get worse from here. After two years of steady fall in economic growth and earnings, it would appear that we’ve hit rock-bottom. With economic growth picking up marginally to 4.8 per cent in the July to September quarter, despite a fall in government spending compared to April to June quarter this year, gross domestic product (GDP) growth has remained range-bound. While nobody is talking of a recovery just yet, the positive is that irrational exuberance has been replaced with pragmatism.
The markets and foreign investors seem to have reconciled themselves to the challenges the economy faces and, as a result, high hopes haven’t been factored. First, the RBI isn’t cutting rates, and secondly, the rupee is expected to remain at current levels. In fact, it is expected to depreciate by a few per cent each year. A weak rupee should continue to support corporate earnings. Also, some of the measures taken by the government will continue to aid growth in select sectors like mining. Aditya Narain of Citi Research expects a steadier and relatively slower real environment. He says: “We expect a slight GDP growth pick-up (5.6 per cent in FY15), average but up-ticking earnings trajectory (eight per cent in FY14 and 15 per cent in FY15).” However, investment and appetite for risk remains tepid.
No doubt, the currency risk persists, as the Federal Reserve is expected to start cutting down its bond-buying programme at some point. Despite the foreign investors selling equities worth $3.9 billion between June and September, India has been a net recipient of $7.1 billion since April this year. It is apparent that there are takers for the India story despite all the problems. Goldman Sachs says 2014 would likely be a transition year for India and while the Federal Reserve is expected to start tapering, “the impact on emerging markets like India may not be large”. So, no fireworks are in store, but neither are the brickbats.
