Indian stock market rally – will it continue?

Within the domestic investor space, the regional concentration has also been increasing towards Mumbai and Ahmedabad over the last few years (in terms of proportion of cash equities), while that of other cities has contracted.

ECONOMIC OUTLOOK

As per India’s Central Statistical Organization, India’s GDP growth for FY2013-14 is expected to remain at sub-5% levels, same as in FY2012-13. Industry was the main drag on growth. This has been severely hit due to an absolute slowdown in manufacturing activities and the continued freeze in the capex cycle.

Apart from manufacturing, lower mining activities also impacted industrial production. Mining was impacted due to the slowdown in the sanctioning of approvals for projects, given the scenario where ministers and bureaucrats preferred not to give any decision rather than give a decision and risk getting embroiled in yet another scam.

Manufacturing slowdown included a slowdown in the production of both capital goods and consumer goods. This year was also the first in many years when car sales in India were lower.

GDP in the services segment is expected to be around 7% for the third successive year in FY2013-14. However, this is much lower than the 10% annual growth seen during the FY2005-06 to FY2009-10 period.

GDP in agriculture saw a slight revival due to better than expected monsoons last year. However, weather vagaries like a sudden hailstorm earlier this year and uncertainties regarding El Nino plague the outlook for agriculture in the coming months, with any shortfall in production likely to result in a price hike.

Coming to inflation, the Wholesale Price Index (WPI inflation) stabilized at 5% since January 2014 onwards, after remaining sticky at 7% between August and December 2013. This dip has helped bring down the overall WPI for the fiscal year to sub-6%, which is lower than 7%-9% seen in the last three years.

This contraction was aided by both primary articles and fuel and power. The Consumer Price Index (CPI inflation), a better indicator of the impact of price rise on the common-man, dipped successively during the months of Jan and Feb 2014, after breaching the 10% mark frequently during the months of CY2013.

Food inflation has been a critical reason for high CPI in recent years, including grains, lentils and protein-based foods. Possible weather uncertainties this year might impact crop output, and hence it remains to be seen if the CPI can remain in the 8%-8.5% range where it is currently.

The Reserve Bank of India (RBI) continued its hawkish stand on policy rates given the inflation scenario. The key policy rate – repo rate, was hiked few times to 8% levels. High interest rates continue to impact the economic growth and consumer spending.

CURRENT ACCOUNT DEFICIT

The current account deficit had been a major concern in recent years. During this fiscal year, it was brought down to manageable levels of 1.5%-2% of GDP. This was achieved by a reduction in imports, especially of gold following guidelines on import duties and re-export of imported gold.

However, a criticism of this has been of possible gold smuggling to feed the demand for gold in India. Oil prices remained soft this year – a slight cooling in the Chinese economy being a possible contributor.

Stable global oil prices, coupled with stabilizing of the INR at 61-62 since the 2nd half of the year helped the burden of the oil import bill. The trade deficit narrowed during the year aided by the contraction in imports, and India’s foreign exchange reserves reached US$300bn levels, sufficient for around nine months of imports as compared to around six months back in May 2013.

However, export growth remained sluggish, albeit a slight uptick during mid-FY2013-14. Expected growth in exports is far from achieved, given continued slowdown in India’s traditional export destinations, slow uptick in new export destinations and India losing the benefits under the European Union’s ‘Generalized System of Preferences’ scheme.

While the depreciation of the INR created some export competitiveness, currencies of some other export-oriented countries also fell in the same period negating that factor. Hence, export growth really boils down to segments where India has competitive advantages, be it in technology, ITES, pharmaceuticals, automobiles and automotive ancillaries, etc.

The fiscal deficit is estimated to be at around 4.6% for this fiscal year, much lower than recent years. The main impetus came from subsidies, especially following diesel price deregulation. However, government tax receipts might not swing much this year, and the disinvestment target remained under-achieved, and was in fact even scaled down during the year.

Severe criticisms remain on the fiscal front. Reasons attributing the contraction in the fiscal deficit also include rolling over of subsidies to FY2014-15 in order to contain the fiscal deficit for FY2013-14 (estimated at around Rs1.2tn across oil, fertilizer and food), limiting public expenditure programmes, which impacted growth and income in the country, expenditure towards non-asset creating projects for populist reasons, and dividend earnings from public sector organizations.

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