Indian economic slowdown – a reality but recovery may not be far

Demonetisation, GST, RBI, IMF, millennials, phones, cars, politics, movies, restaurants...

Indian economic slowdown has become a fancy word now a days. You have too much of related news coming through and everyone is picking it as per their convenience and preference.

For pessimists we are doomed and for optimists we are getting set for a very bright future !

Pessimists believe that demonetisation and GST have created significant damage to the Indian economy and it will take a very long time for the effects to wean off. On the other side, optimists are attributing the same measures to be structural changes in the economy that will soon show the results and set us towards a significant growth phase.

My regular readers would concur that I don’t belong to either of these extreme beliefs. For me, demonetisation and GST are neither the reasons for the current slowdown nor will lead to any significant uptick. Yes, GST is structural but needs to be complemented with additional measures to yield real benefits (maybe I will try to write on this in a separate post).

How can demonetisation be the reason for current slowdown when almost all the currency is back into the system? Yes, it did create the short term impact then.

How can GST, which is a supply side reform result in the current economic slowdown? All of us agree that the current economic slowdown is more of a demand side issue then supply side.

Purists would argue that it would be foolish to look demand and supply side in isolation and I would agree… some correlation and hence impacts are inevitable… But then it would also not make sense to associate these supply side measures to be the main reasons.

The fact remains that none of the pundits, analysts and corporates could predict the current slowdown at the peak of optimism in January 2018 and both demonetisation and GST happened well before that.

Even during the initial phases of slowdown, most people chose to ignore the declining numbers calling them one offs. It’s only in the last few months that there is a wider acceptance of the slowdown.

For me, as previously mentioned in many of my articles, ‘weak consumer sentiment’ is the main reason for current economic slowdown.

It’s the fear of unknown that has made consumers hold back

There are varied reasons for this fear – IL&FS, Yes Bank, DHFL, tight liquidity conditions, NBFC crises, Tax notices, real estate frauds, stock market meltdown, debt market defaults etc etc etc. One can notice that many of these events played out one after another, especially since August 2018 creating uncertainties in the minds of the consumer.

How is it now? Are there any visible signs of recovery?

Some relevant news around this and my observations on the same –

  • RBI and IMF have significantly reduced FY 20 GDP forecasts for India – for me those are simple mathematical revisions and do not convey much.
  • Consumer spending on phones, movies and restaurants continue to remain robust – my only observation related to that is people have money but current spending pattern is more geared towards lifestyle items and not towards discretionary products, e.g., real estate and cars.
  • World is changing, Millennials are different and they do not believe in committing towards long term assets – maybe true but I would personally like to check this in a good sentiment environment. Many of these behaviour patterns can change significantly over different periods. For me it’s hard to believe why majority of people would not want to own their own car or live in their own house.

Contrary to popular belief, the situation has not worsened. I would instead believe that we may be entering into revival.

Reasons include –

  1. Consumer can not remain on the sidelines for long – It’s been almost 2 years that the caution started creeping in. Event after event kept the consumer cautious. I believe this might be getting over now both due to him starting to lose the patience (of being cautious) and government working on creating the positivity.
  2. Quarterly performance of the Companies so far – whether it’s banks, consumer companies or infrastructure related – yes there is caution but much better than many would have expected, given the widespread pessimism.
  3. Steps by the government – Corporate taxes got rationalised recently and there is a widespread expectation of reduction in personal taxes. Whether that happens or not, the rumour itself is helping improve the sentiments.
  4. Declining interest rates – policy rates have corrected significantly over the last one year and the consumer has finally started seeing the benefits. This should again help in reviving the demand.
  5. Good monsoons – is the general observation of the weather department. This should help reviving the rural demand.

Factors that I am cautious about –

  • Real estate debt – there is significant real estate linked debt stuck in the Indian financial system. Given that the sector continues to face significant headwinds, it remains to be seen how this plays out. Any significant shocks can derail the entire revival process.
  • Government finances – are getting hit due to a weak economy and recently announced tax cuts. Some of this is bound to get compensated through government’s increased focus on tax compliances. This can create some uncertainties for some sections of consumers.
  • Global factors – including Trade War, global growth concerns, Brexit and US getting into an election year. These can have direct or indirect effects on the Indian economy.

No one can predict the top or the bottom. One can only look for subtle hints, observe general behaviour and make a calculated guess.

My previous related notes –

Corporate tax cuts – sets it up nicely between the bulls and the bears

Is it time to buy the Indian midcaps – Update September 11, 2019

Disclaimer: These are my personal views and not any recommendation. The reader should do his own research before making any investment related decision.

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About the author

Nitin Jain

A finance professional with around 20 years of investing experience in Indian markets both on buy and sell side, equity and debt, private and public with some of the best organizations globally including Goldman Sachs, ICICI Group, ICRA and others. He is a All India Silver Medalist CA by qualification.

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