What ails the Indian economy?

We may take solace by blaming the international developments for the mess that we have created around the growth prospects of Indian economy. The commonwealth games scam, about a year and a half ago, that laid the foundation of a policy paralysis in governance, has spread its tentacles too far and way  beyond the imagination of most analysts who were banking on the 'India shining' theory. We may take pride in the fact that we still continue to grow at 5.8% annually as compared to the widespread recession in the Euro zone. But the fact remains that we have not grown to our full potential. The average Indian has become too pessimistic about the economy, thanks to the lack of governance, and this is telling on the GDP growth. The major factors contributing to the gloomy scenario are discussed here-under:

• Over reliance on 'foreign money': Indian economy has achieved sustainable growth in the past on the back of the high savings and investment rate by the households. The savings and investment has suffered due to the cautious approach of the Govt. and lack of enough incentives to promote 'investment skills'. Most Indians still invest a bulk of their investments in unproductive assets such as physical gold and real estate. This not only hampers the availability of funds for growth but is also a big deterrent in curbing the menace of black money. The govt. on its part has not given enough incentives to the local population to encourage investment in growth avenues. As a result of this many development projects are suffering from lack of capital. Secondly, the companies that raised overseas funds to fund their growth have hit a debt trap with the depreciation of the Indian rupee.
• Irresponsible politics: The ruling party, its allies as well as the major opposition party have been at loggerheads with one another. Their irresponsible behaviour is responsible for the ongoing policy paralysis. The so called 'Civil society' movement has also played havoc with the economic decisions, as their members are now indulging in cheap gimmicks to attract public interest. These people must remember that power without responsibility is even worse than the corruption issues that they are highlighting. The decision making process of the govt. has been virtually suspended due to illogical threats by the alliance partners. An example: The inability of the Govt. to raise diesel/ cooking gas prices has lead to a distortion in fuel prices, with petrol and diesel price differential leading to confusion all around. Infrastructure, Power and aviation sectors are bleeding due the indecision by the govt.
• Inability to curb 'Food inflation': Govt.'s inability to curb food inflation has created a situation that is keeping the interest rates high and putting undue pressure on the Indian Rupee. Adequate steps are not being taken to overcome supply side bottlenecks, on the other hand raising of MSP for crops is fuelling food inflation. Most of the benefits, such as fertiliser/ seed subsidy, intended from small farmers are actually being used by middlemen.

The only saving grace for the GDP growth of Indian economy has been the services sector which continues to grow at a double digit level. With industrial production dipping into negative territory for March '12 and agriculture sector stagnating in the 2-3% range, it will be extremely difficult to achieve a growth rate of 8-9% in GDP numbers. The Govt. needs to encourage investment by Indian citizens rather than waiting for foreign investors to lead the revival.

Bad phase for Risk investment: The bad phase for risk investments is likely to continue a little bit longer. While international commodity markets have cracked, equity and real estate markets ate still holding on. Any negative cycle in global markets is not completed till real estate prices correct substantially. Investors can look forward to a substantial correction in real estate market as supply-demand distortions reach dis-proportionate levels. Equity markets could make the final bottom thereafter. this entire cycle is likely to be completed in the next 4-6 months, thereafter it will be a smooth ride for equity markets. This could well be the final phase of the downturn which would lay the foundation of the next bull run in equity markets.

Is the India growth story over?

With the declaration of India's quarterly GDP numbers last week everybody is asking whether the India growth story is over? The situation has a number of similarities with the gloom that prevailed during the latter half of FY 2008-09. India's GDP for FY 2011-12 has plummeted to 6.5%, lowest in last 7 years and even lower than 6.7% recorded during 2008-09. The Jan-Mar '12 quarterly growth comes at a paltry 5.3%, way below expectations of analysts. This led to a prompt call by international rating agencies for further downgrades in earning prospects of Indian economy for future quarters.

Investors are turning jittery as their portfolio's bleed. At this juncture, I would like to reassure the investors that this is not a good time to exit equity and other risk assets, but to prepare towards building a decent long term portfolio in the ensuing downturn. I always maintain that one's ability to analyse the future with reasonable accuracy is the key to make money in equity markets.The reasons for the current gloom in the markets was analysed by me and advised to you during by blog posts in the past 3 months, and presently all of those negative factors have almost played out as detailed below:

• Governance deficit/ policy paralysis has taken its toll on the GDP numbers. We have gone through a tough phase in Indian polity with a lame duck govt. and an irresponsible opposition playing havoc with economic issues.
• Indian Rupee has weakened the most amongst peers as it touched a lifetime low of 56.5/ $ during last week.
• Inflation continues to be stubbornly high, with food inflation refusing to come down. This leaves little room for RBI to lower interest rates.
• Global slowdown has accelerated further, with Euro zone crises coming back to haunt the markets. Chinese demand slowdown has hit the scenario of commodity demand tapering off.

However, when we have a closer look at the above issues, we would be able to see a silver lining for the future. With the Govt. pushed into a corner by the opposition and its allies, it may see it as a last opportunity to salvage its position with some bold reformist measures. We could witness a slew of reforms after the conclusion of presidential elections in July. Indian rupee after a massive fall is now poised for a consolidation in the 54-56/ $ range, given the oversold market conditions. Inflation will slowly start to move down with the progress of monsoon, and the fall in prices would accelerate after September '12. The euro zone crisis will act as a boon for Indian economy, with investors returning back to Indian risk assets once Rupee starts strengthening and inflation coming down. The fall in global commodity prices, especially crude oil augers well for Indian economy.

Future of Equity markets: Indian equity markets would enter into a consolidation phase now. The market is likely to consolidate around 4700-4800 levels on Nifty and the consolidation phase is likely to continue for next 5-6 months, after which there is likely to be a sharp upturn in India's fortunes. In the worst case scenario the markets are unlikely to fall below 4531 on Nifty (the lower bottom made during Dec.'11). Investors are advised to use the fall in markets for accumulating blue chip stocks: Example: BHEL/ L&T quoting at their historic low PE multiples.

Future of Commodity markets: As indicated by me in the past, precious metals like Gold/Silver have ruled firm in Indian markets, due the support extended by depreciating rupee. With the rupee depreciation having played out markets for precious metals may slide substantially during the next couple of weeks. Crude Oil has already slumped over 20% from its peek.