As highlighted in our earlier note on May 20, most of the exit polls pointed in the direction of the final results being pro-incumbent and single-party majority for BJP. Modi Wave has become a Modi Tsunami leading to a stable government at the Centre.
As highlighted in our earlier note on May 20, most of the exit polls pointed in the direction of the final results being pro-incumbent and single-party majority for BJP. Modi Wave has become a Modi Tsunami leading to a stable government at the Centre.
* Based on Leads data till 7pm. Source: Google
The watershed 2019 Indian election has thrown a decisive mandate. This is the first ever Non-Congress government has been re-elected in Indian electoral history. As a result, the new government will have the ability to pursue the economic reforms initiated in the past five years. This should ensure continuity of the policy and structural reforms and is likely to boost business and consumer sentiment, which in turn will revive economic growth yet again.
Source: Bloomberg, CMIE
WE BELIEVE NDA 2.0 IS FACING MANY CHALLENGES, AS BELOW:
- Domestic Economic Slowdown – Mixed Signals:
Domestic macro data has been all over the place with some high-frequency indicators pointing to a slowdown whereas others showing positive growth. Latest Q3FY19 GDP growth at 6.6% was the lowest in 6 quarters which led to 20bps lowering of FY19 GDP estimates from CSO. RBI too lowered FY20 GDP estimates by 20bps at the April 2019 meeting. Even the latest core factory activity at 4.7% YoY is weak at 5-month low and IIP data has come in negative after 21 months at -0.1% YoY. But Nikkei PMI has been in expansion territory for 21/11 months, for manufacturing and services, respectively. GFCF growth has remained in double-digits for the 5th consecutive quarter ending Dec 2019 and capacity utilisation has shown improving trends coming in at 76% which is a 19-quarter high. Even demand for credit is on the rise as numbers from RBI show 5- month average credit growth at 13% - continuous improvement since bottoming out in Feb 2017.
- Twin Deficit Risks:
Fiscal deficit target of 3% as laid down by FRBM Act has been postponed by 3 years by NDA 1.0 from FY18 to FY21. April month exports have come in at +0.6% YoY which is at 7-months low. Imports have also slowed down due to weakening in demand to +4.5% YoY, but trade deficit has widened to USD15.3bn. This is likely to push CAD higher to 2.4% of GDP. Forex Reserves are at $420bn and import cover is also healthy at 10 months.
- Tightened Liquidity / Deficit:
Increasing currency in circulation pre-Elections and high Credit-Deposit ratio at 78% along with improving credit growth has kept liquidity in deficit. The front loading of Government borrowing program, as announced, have also kept long-term bond yields elevated. This tightness has led to delayed and limited rate transmission by banks.
- Reversal of Inflation:
Deflation in food prices has kept the headline inflation within the RBIs comfort zone of ~3%, for several months although Core has been stable at higher level of ~6%. This low base- effect will reverse in coming time and inflation may start to rise. There are additional risks because of below-normal monsoons this year and global crude oil price rise.
- US-China Trade War – Boon or Bane:
With Trump imposing tariffs on increased value of imports from China, it now seems he is setting the field for re- elections in 2020. Chinese have also said they are not going to take this sitting down and have also warned of counter measures. This has already impacted global trade and India cannot be an outlier. On the other hand, now that this government has won a strong mandate, we expect FDI inflows to be higher than previous years. We expect ‘Make in India’ initiative likely to see traction with global manufacturing majors gaining confidence and hence leading to job creation in this term of 5 years.
- Crude Oil Price Rise and Specter of US-Iran Standoff:
This also has been an enigma many analysts have failed to understand. OPEC supply cuts have been successful in pushing the Crude Oil prices up by 40% CYtD. The recent standoff between US and Iran over Saudi Arabian ships being sabotaged has also led to rising geo-political concerns which may further push oil prices up. This will impact India as we are dependent on imported oil to a great extent. Retail fuel prices can now be hiked given the Election season is over.
Domestic macro data has been all over the place with some high-frequency indicators pointing to a slowdown whereas others showing positive growth. Latest Q3FY19 GDP growth at 6.6% was the lowest in 6 quarters which led to 20bps lowering of FY19 GDP estimates from CSO. RBI too lowered FY20 GDP estimates by 20bps at the April 2019 meeting. Even the latest core factory activity at 4.7% YoY is weak at 5-month low and IIP data has come in negative after 21 months at -0.1% YoY. But Nikkei PMI has been in expansion territory for 21/11 months, for manufacturing and services, respectively. GFCF growth has remained in double-digits for the 5th consecutive quarter ending Dec 2019 and capacity utilisation has shown improving trends coming in at 76% which is a 19-quarter high. Even demand for credit is on the rise as numbers from RBI show 5- month average credit growth at 13% - continuous improvement since bottoming out in Feb 2017.
Next 100 Days....
Now, that the decisive political mandate is in place, focus will shift to manage macro challenges and sustain healthy growth for longer periods of time. This, we believe, will cement India’s position as an attractive destination for investments relative to other emerging markets.
To address a few of the above-mentioned challenges, we believe, Modi 2.0 should prioritise their action in 3 areas:
- Quasi Banks Need a Booster Dose:
Since discovery of fraudulent accounting practices at IL&FS in Sep 2018, the liquidity has tightened for NBFC/HFCs (quasi banks), uncovering their huge asset-liability mismatches and stalling their high-paced loan book growth. The trickle down effect we have seen over the last 9 months must be stopped as a delay could cause severe damage to the overall confidence in the financial system itself.
RBI at its Board meeting on May 22 2019 took a decision to not extend credit line to crisis-hit NBFCs as they felt there is no systemic liquidity issue but solvency concerns in some large entities.
Government might address these issues so the NBFCs get access to capital and liquidity. One of the ways to restore confidence in the NBFC/HFC sector is by joining and asking the RBI to fast track its fight against liquidity crisis through the measures it has already taken.
One area of pain for NBFC/HFCs has been their Real Estate lending exposures in the form of developer financing. Slowdown in housing sales was further affected post-GST and RERA implementation leading to cash-flow mismatches at the developer end. Excessive over-valuations of projects and land banks that had led to huge growth in lending have started coming down. A delay in providing stimulus to HFCs could put pressure on real estate developers. Modi 2.0 should play a balancing act by extending support to distressed developers and meet targets under ‘Housing For All’ scheme by 2022 by keeping prices under check.
- Reversal of Rural Distress and Consumption Slowdown:
All weather demand driver, domestic consumption has met with severe slowdown in the past couple of quarters owing to rural distress and lack of credit and tighter liquidity. Rural wages have been growing at a much slower pace of about 3% YoY than the 6% growth seen in 2018. Food deflation has further added to the farmers woes who was already suffering from twin blows of Demonetisation and GST. Consumer discretionary purchases have been trending down and can be predominantly seen in falling automobile sales over the last 6 months (April volumes down 14% YoY). Even, FMCG companies reported slowing growth of consumer staples in Q4FY19 earnings attributing it to rural distress from low farm incomes and disrupted non-farm incomes.
We believe, the government can do some GST rates rationalisation by calling a GST Council meeting and increase the payouts under Minimum Income Scheme (PMKSY) through DBT.
- Governance Reforms Top-up:
FPI flows have been contingent on the political environment for policy continuity, despite the structural advantages that India offers in terms of favourable demographics, improved ease of doing business, democratic and accountability in governance and credible regulatory framework. Given the resounding mandate, FPI flows likely to surpass that of previous years.
Since discovery of fraudulent accounting practices at IL&FS in Sep 2018, the liquidity has tightened for NBFC/HFCs (quasi banks), uncovering their huge asset-liability mismatches and stalling their high-paced loan book growth. The trickle down effect we have seen over the last 9 months must be stopped as a delay could cause severe damage to the overall confidence in the financial system itself.
RBI at its Board meeting on May 22 2019 took a decision to not extend credit line to crisis-hit NBFCs as they felt there is no systemic liquidity issue but solvency concerns in some large entities.
Government might address these issues so the NBFCs get access to capital and liquidity. One of the ways to restore confidence in the NBFC/HFC sector is by joining and asking the RBI to fast track its fight against liquidity crisis through the measures it has already taken.
One area of pain for NBFC/HFCs has been their Real Estate lending exposures in the form of developer financing. Slowdown in housing sales was further affected post-GST and RERA implementation leading to cash-flow mismatches at the developer end. Excessive over-valuations of projects and land banks that had led to huge growth in lending have started coming down. A delay in providing stimulus to HFCs could put pressure on real estate developers. Modi 2.0 should play a balancing act by extending support to distressed developers and meet targets under ‘Housing For All’ scheme by 2022 by keeping prices under check.
We believe, the government can do some GST rates rationalisation by calling a GST Council meeting and increase the payouts under Minimum Income Scheme (PMKSY) through DBT.