Don’t use the word “recovery” yet. The Government recently lowered their FY16 growth forecast to 7-7.5% from 8.1-8.5%. Thus, with 1HFY16 growth already clocked at 7.2%, the Government does not expect any significant recovery in the second half. This will be the second consecutive year of growth stalled in the 7-7.5% range. In all likelihood, FY17 will be the third year. Don’t look for any economic miracles in 2016. Here are a few reasons why this illusive recovery is still some time away:
1. Nominal growth has fallen: While headline real growth rates remain in the 7% range, India’s nominal GDP growth rate has nearly halved to 7.4% in 1HFY16 from 13.5% last year. The recently released Mid-Year Economic Analysis has recognized this slowdown in nominal GDP growth as an area of concern since it has implications for India’s fiscal deficit. If this slump continues, there will be limited room to raise capital expenditure next year without hitting the fiscal deficit. Besides, next year will also see the fiscal impact of measures like Seventh Pay Commission, One Rank One Pension, which will limit room for any major push to public investment. Hopefully, these measures will stoke consumption and growth in the second half of next year.
2. Pace of rate cuts will slow down: The RBI cut policy rates by 125bps in 2015 and this seems to be as good as it gets. For next year, the RBI will look for a) oil prices remaining where they are and b) the Government’s intent on fiscal consolidation. The best on both fronts seem to be over for now. Oil prices have fallen off a cliff in the past two years and further decline in 2016 might not be as sharp. On the fiscal front, as mentioned above, the Government’s room to push for further consolidation remains limited with the planned stimulus to Government salaries and pensions. Also keep a watch out for Government bond yields – this year, they’ve hardly moved despite a 125bps fall in policy rates. With more foreigners invested in Indian G-secs, a global sell-off in emerging market bonds can hit us hard.
3. Bad loans problem isn’t over: In its Financial Stability Report, the RBI stated that “corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring.” Bad loans, especially at public sector banks, remain an issue. Net non-performing assets at these banks increased to 2.8% of gross advances for the quarter ended Sept 2015, from 2.5% for the quarter ended March-2015. With 19.5% of total advances, the industrial sector accounted for the highest share of stressed loans. This problem isn’t going away any time soon. Watch out for large NPA write-offs in 2016.
4. Global volatility: Low crude prices, a strong US Dollar, Fed raising interest rates, Europe and Japan keeping them low and – if all that wasn’t enough – a slowdown in China. All of these factors move in tandem and are raising volatility globally. India cannot go unscathed. We will be vulnerable to foreign capital flights – both from equity and debt – in case of global panic. While low crude prices have benefited us, the stronger US dollar has hit exports. With the Fed lift-off now out of the way, watch out for the pace of rate increases in the US in 2016.
5. Bear market in equities: Stock markets have come off record highs and the mood remains lackluster. As mentioned in an earlier column, India’s stock markets remain range-bound and this will not change in 2016. However, mid-caps have beaten large-cap stocks for the second consecutive year indicating that investors are rewarding performance beyond frontline stocks. They are rewarding stocks which are focused on domestic growth recovery, have strong balance sheets, and have strong cash generation – think select private sector banks and high-quality consumer brands. In times of uncertainty, this safety trade will continue to play out in 2016 as well.
To reiterate, don’t expect economic miracles in 2016. With global volatility here to stay, and domestic economic growth indicators remaining weak, limit your celebrations to Thursday night. Have a prosperous New Year.
Anupam Gupta is a Chartered Accountant and has worked in Institutional Equity Research since 2000, first as an analyst and now as a consultant.
He contributes to the Business Standard platform, Punditry, through his blog, Beyond Markets onmarkets & the economic horizons.
He tweets as @b50
