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India Outlook: Slowdown Ahead?

by: The Indian Analyst October 01, 2008 | about stocks: EPI / INP / PIN    
Ajay Jindal

The Indian Analyst

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For those who don't know Anirvan Banerjee, he is perhaps the leading global expert on business cycles. He heads research at something called Economic Cycle Research Institute (ECRI) in New York. If you want to know where the global economy is headed, then one of the best people to go to is Anirvan. And he just said something that should make all of us in India very concerned.

This is something he said to a paper  Monday:

A growth forecast for India?
In India’s case the trend growth rate is so high that we are really not talking about a recession but a slowdown.

Instead of negative growth which marks a recession, we are talking about less positive growth — a slowdown. But according to our Indian leading index, India is headed into its worst slowdown in at least a decade.

Mark the words - worst slowdown in a decade! So go look back 10 years. THe worst period in India's last 10 years was the FY01-03 period, which set the lows for both GDP growth and industry growth. The lowest GDP growth in the last 10 years was 3.8% in FY03 and the lowest IIP growth was 2.7% in FY02.

I don't know if we are headed that low, but clearly the economic data and corporate sales and net profit data is going to take a sharp dip.

The latest statements coming from economic analysts seem to indicate GDP growth rates of around 6.4-6.5% in FY09. Both Morgan and Deutsch analysts seem to be saying this. Citi is still above 7% for its forecasts, or so it appears.

This will be the slowest growth rate since FY03, when the economy grew 3.8%. However, at 6.5%, the GDP growth rate is still better than the entire FY98 to FY03 period. So the real issue now will be how much will the GDP grow in FY10. It is too early to say at this point for anyone. The way US is going, it could well be less than 6% growth for FY10, but no way to say.

So where should the Indian market quote? In the FY98 to FY03 period, Indian markets would still quote around 11-13x forward earnings. 11x forward is the bottom of the range for Indian markets. Things are not that bad yet for this to be breached. So I will stick to my earlier estimate of 11,000 to 13,000 for BSE Sensex in this scenario till Dec08.

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This article has 7 comments:

  •  
    Oct 01 04:30 AM
    to understand the indian economy, you really need to analyze gdp on a per capita basis to understand if there is any real gdp growth.
    Reply
  •  
    Oct 01 08:40 AM
    have you factored the bailout India may be asked to do to Bush and co?
    Reply
  •  
    Oct 01 10:25 AM
    Look at India GDP for the last several quarters. Net of inflation, there has already been a significant slow down. Perhaps worst than what we saw in the prior 10 years; in a sense, real GDP has contracted. I expect this trend to continue for a further six months and believe that it is substantially priced in, with unlikely downside potential to 9500-10000 range.

    I feel we are in a situation where interest rate cuts can begin to flow through after 6 months (max maybe 3 months); this together with several catalysts (Commonwealth Games, NSG etc.) should reignite growth. Foreign capital flows coming back (or at least not being withdrawn) will be another positive. Only factor to watch out for is politics; a single party in majority is unlikely, but a strong coalition is desirable. Both leading parties are capable of formulating good growth policy, so I have no preference. Only caution is that people should not expect the irrational fwd multiples we had while market traded at 21K. For next year a sensible expectation if growth returns is 16X 2010 fwd earnings - i.e. 17k-18k levels.
    Reply
  •  
    Oct 01 12:04 PM
    I agree with Shiv that GDP has already shown significant slow down (net of inflation). Last few years has shown that GDP growth rates is driven primarily by service sector (~72% weighted contribution) while employing less than 8% of the population. In contrast, the agriculture sector has contributed less to GDP growth rates (~10% weight contribution) while close of ~60% population depend on it. Similar gaps can be seen with infrastructure also. This imbalance cannot continue forever. There has to be reversal to mean growth rates. While one can hear in loud speaker of Indian great story, majority of the population is not benefiting from it. The consistent growth rate can be maintained if India addresses all aspects of economy (not just the service sector – primarily driven by exports). If private sector and FII investments go to industrial/service sectors, why can’t govt focus its spending on creating platform/policies for agriculture and infrastructure ?
    More data on www.galatime.com/2007/.../

    Reply
  •  
    Oct 02 07:57 AM
    This is an explanation on Shiv's comment. The GDP data normally talked about is real GDP. So inflation is not part of it. As per official data, India has never had a recession in its history

    But sure, official data has to be taken with a pinch of salt. I dont think anybody knows what is the real growth rate in services sector
    Reply
  •  
    Oct 02 11:48 PM
    The Indian Analyst; normally when things turn nasty in an economy, in order to identify a slowdown ahead of the pack I adjust GDP to provide a picture which better highlights the immediate situation. I do not look at the GDP growth based on 99/00 $'s, because inflation since then has been slow except for now when it has escalated. I use the ministry of finance data on nominal GDP and look at quarter on quarter growth adjusted for inflation now prevaletnt. This gives a better feel for what is going on now.
    Reply
  •  
    Oct 10 12:29 PM
    This is excellent. My call too has been about a 6% GDP growth for FY2009-10 and less than 5% for the next financial year. There simply is not enough supply and domestic capital can only keep economy growing at 4 to 5%. So, if foreign capital is shy for one year, India will suffer.
    As regards the index, even 9K is a fair level given that corporate earnings will slow down for this year and next. A 12X market is a good one to pick up some good long term bets at decent prices.
    Reply
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