Of late, there has been a lot of talk about the slowdown in India’s economic growth, particularly after the June 2017 print for GDP growth came in at 5.7%. At the same time, we are witnessing the Nifty scale new heights during the month, though the market did correct towards the end of the month.
There are many reasons for the slowdown in growth – some commentators have laid the blame on the lagged effect of demonetisation as also the glitches related to GST. With currency levels in the economy back to near pre-demonetisation levels, it is expected that the impact of demonetisation on GDP growth should be more of a thing of the past. GST is going through its teething troubles which was somewhat expected given the historic nature of this reform and the complexity of the project. The government’s readiness for GST has come under some criticism from different quarters as industry is forced to deal with considerable blocking up of working capital due to the glitches with GST.
Another reason for the slowdown in economic growth is the inability of the PSU banks to lend because of the large NPA problem that they are facing. With the RBI moving quickly on the larger NPAs, one hopes that we can find a lasting solution to this thorny problem over the next few quarters. This needs to be coupled with an effective recapitalisation of the PSU banks by the government, so that the banks can provide the much needed capital to borrowers. The strength of the rupee in recent months is also one of the reasons for the slowdown in domestic growth as it encourages import and discourages exports.
At the same time, one is witnessing increasing inflows into domestic equity mutual funds. This seems to be driven by the fact that interest rates on deposits have fallen over the years and the real estate market is also offering lower returns to prospective investors. The IPO market has shown a rebound and a number of different kinds of companies have been raising money from the primary market. The flow of funds has also raised equity values and this is particularly visible in the mid cap and small cap stocks.
The economic cycle which peaked around FY2012 has been weak for 5 years now and it seems to us a question of time before we see an end to the current phase of slowdown. The capex cycle is moribund and needs a push from the government. We did observe some pick up in the automobile sales in August and await confirmation of automobile sales during the festive season as one of the first few green shoots that the economy may be on a path to recovery. A number of issues still need to be addressed, related to GST and the NPA issue and the government needs to kick-start the economic cycle by front ending investments in infrastructure and related areas. India’s central fiscal deficit is now a very respectable number – we can afford small slippages on this front for now, in order that the government may front end the capex cycle by investing more in capex.
The increased equity prices in recent times have made our jobs more difficult in terms of how to invest the new money that we receive. We hope that the current correction in the market gives us a better opportunity to invest. We hope to continue to exercise discipline in our purchases so that we continue to meet the triple objectives of protecting capital, beating inflation and beating the market over the long term.