Monday, 8 January 2018

India’s FY-18 GDP Set To Come Around 6.50%, The Lowest Since FY-14 After DeMo & GST

After market hours today (5th Jan), Indian CSO released its 1st estimate for FY-18 GDP at 6.5% vs 7.1% (FY-17) & 8% (FY-16); this is broadly in line with market estimates Of 6.6%, although will be the lowest since FY-14 (under current BJP Govt), largely as aresult of lingering DeMo & GST disruptions.

Moreover, FY-18 GVA came quite muted at 6.10% vs est 6.50% (market) & 6.70% (RBI); prior: 6.6% (FY-17) & 7.9% (FY-16). Notably per capita net income for FY-18 may be around Rs.1.11 lakh with growth estimated at 5.3% vs 5.7% (prior). As par CSO, H2FY18 GDP should come around 7% vs 6% in H1 (5.7% in Q1FY18 & 6.3% in Q2FY18).

Overall, today’s CSO estimate paints a bleakpicture of manufacturing & consumption, slower farm sector growth amid agrarian discontent amid DeMo & GST blues while paints a bright picture on private investments, financial & real estate services on booming stock market & favourable base effect, Govt’s infra spending spree (road sector) and theme of affordable housing. 

Gross fixed capital formation (GFCF-a proxy for investment), private final consumption expenditure came good. GFCF is projected to grow around 6.5% in FY-18 vs 2.9% in FY-17; but some other private data for Q3FY18 may be also indicating new private investments around Rs.0.77 tln, almost 50% of Q3FY17. 

Today’s CSO estimate has not fully captured the Q3FY18 data. At constant prices, GFCF is estimated to grow at around 29% in FY-18 vs 29.5% in FY-17.

The muted scenario of rural economy & recent election setback for BJP in rural Gujarat may compel the Govt to allocate more rural capex and we may see a rural facie budget next month for FY-19; fiscal deficits may be breached well off the earlier target simply because the absolute GDP number will be less than the BE, everything being equal. Nominal GDP (at market price without WPI/inflation deflator is expected to grow at 9.5% vs 11.75% BE for FY-18.

Govt may now focus on revenue and GST & direct tax recovery/LTCGT to make the fiscal shortfall, which may turn into another disruption. On the other side, if FY-18 fiscal deficit breached significantly higher to 3.5-3.7% vs BE of 3.2% & Brent oil soared to $70, then rating agencies may also review India.

FY-18 exports growth also came muted, while Govt final consumption expenditure growth projected to reduce significantly to 8.5% from 20.8% (YOY), a signal that Govt is pruning its capex considering the elevated fiscal imbalances. 

Today’s GDP estimate of 6.5% by CSO for FY-18 is far less than Govt’s own projection in the last economic survey in Aug’17 for 7.1% ( 6.75-7.5%) and is comparable to FY-14 level of 6.4% under UPA’s so called “policy logjam”, but may be better than FY-13 level of 5.5%, also known as UPA’s “policy paralysis”.

The GDP trajectory for FY-18 indicates towards not only Pre-GST disruptions, but also a chaotic Post-GST disruption because of so many complexities, multiple rates even for the same class of goods, high compliance costs not viable for small traders & MSMES. Current GST has various flaws in basic designs and it’s just another version of VAT.

Lack of GST compliances for its complex forms is not only affecting the tax revenue but also affecting free movement of trucks across various states borders (e-permits) contrary to earlier perceptions of one India & one tax. 

Traditionally, Indian consumption story is dependent largely on the unaccounted money. DeMo & subsequent “war on black money” may have destroyed that consumption by at least 20-30%; rebuilding & redistribution of that unaccounted wealth will take time (conversion of black money into white money). 

This conversion was going on for years even before DeMo and coupled with that stressed corporate assets & huge banking NPA/NPL, cancellation of 2G telecom spectrum & mining auction may be largely responsible for today’s subdued economic activity, tepid private capex, muted labour market & real wage growth; overall corporate earnings may be also disappointing.

As par CSO estimate, growth in private consumption is set to decline from 8.7% in FY-17 TO 6.3% in FY-18; this may be an indication that Indian economy needs to generate more quality employment, which can support the required incremental rise in consumer spending. 

In that sense, Govt/CSO should focus on a credible employment data like ADP/NFP report in US, so that Indian policymakers & politicians may take policy decisions relying on actual economic trajectory.

The biggest drag for the Indian GDP growth in the coming years may be muted private corporate investment, even if economy will get some benefit from GST (although that’s too is doubtful). Corporate capex may be subdued despite PSBS recaps as corporate B/S is stressed itself inspite ongoing deleveraging.

Also, NPA issues need an early resolution & actual recovery and banks have to find adequate quality & eligible corporate borrowers with viable projects in hand.

Excess manufacturing capacity & stalled projects may be another indication for overall economic slowdown. 

Earnings Need To Justify Stretched Valuation Irrespective Of GDP Debate:

After all,equity market is a function of EPS (earnings); despite debate about Indian economic growth, so many “green shoots” and multiple RBI rate cuts, Nifty EPS has grown by only around 12.5% from 351 in FY-14 to 395 in FY-17; i.e. at an average annual growth rate of just above 4% over the last three years.

Now, Q2FY18 Nifty EPS stands around 391 (actual), which translates around 11% growth from FY-14 and even if final FY-18 EPS comes around 418 as par actual & projected trend, it will translate average 5% growth from FY-14, which may not justify the stretched valuation (PE) growth of over 40% in that period (FY:14-18). Nifty EPS is growing at an average pace of 5%, while PE is growing by around 10-12% on power of liquidity & global Goldilocks rally.

Thus, earnings need to catch up with the stretched valuation; otherwise PE may come down soon to the reality. All focus may be now on Q3 earnings trajectory from next week and also on the Govt economic survey report on 29th Jan & FY-19 budget on 1st Feb.

If GST disruption effect fades and we have better GDP figure for FY-18 and eight state elections in 2018 are favourable for the BJP, then Govt might call the general election early by Dec’18, so that it could steer the economy properly from March’19 itself and focus on other structural reform like labour & land, private railways (like private airlines), bringing petro products in GST and INR full convertibility. But an early general election may be also negative for policy/economic reforms.

Investments in rail may be a great opportunity for the Govt to stimulate the economy & employment like in China & other DM/EMs; average speed of Indian railways is still around 55 kmph, almost the same for the last two decades or so, which may be an aberration for the overall economic optimism.

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