{"id":66768,"date":"2017-11-07T01:01:45","date_gmt":"2017-11-07T00:01:45","guid":{"rendered":"http:\/\/beta.next-finance.net\/opinion\/india-after-a-period-of-euphoria-doubts-are-resurfacing\/"},"modified":"2017-11-07T01:01:45","modified_gmt":"2017-11-07T00:01:45","slug":"india-after-a-period-of-euphoria-doubts-are-resurfacing","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/opinion\/india-after-a-period-of-euphoria-doubts-are-resurfacing\/","title":{"rendered":"India: After a period of euphoria, doubts are resurfacing"},"content":{"rendered":"

ECONOMIC GROWTH APPEARS TO BE
\nRUNNING OUT OF STEAM. CAN THIS BE
\nCAUSED BY THE SUDDEN DEMONETISATION
\nOF NOVEMBER 2016 ?<\/strong><\/p>\n

According to the most recent data, economic
\ngrowth is indeed showing signs of
\ndeceleration. The country\u2019s GDP only grew at
\na pace of 5.7% in Q2 2017, down from 6.1% in
\nQ1. Naturally one\u2019s first instinct is to blame
\ndemonetisation\u2026 then the implementation of
\nthe unified Goods & Services tax. However we
\nfeel it is important to go back further in time
\nand to realise that the slowdown actually
\nbegan after the peak in Q1 2016 \u2013 when GDP
\ngrew at a pace of 9.2% year-over-year. At the
\ntime, oil prices had turned around and the
\nregulatory measures aimed at deleveraging
\nbanks had come into force (identification of
\nbad debts, higher provisions\u2026). This led to a
\nslowdown in credit growth and a downturn in
\neconomic activity. The sudden announcement
\nthat 500 and 1000 rupee bank notes were to
\nbe withdrawn \u2013 accounting for 88% of
\nfiduciary money in an economy where 80% of
\ntransactions are still made in cash \u2013 only
\nserved to amplify a trend that was already
\nwell under way.<\/p>\n

SO WOULD YOU SAY THAT GOVERNMENT
\nPOLICY HAS HAD A TANGIBLE IMPACT ON
\nECONOMIC GROWTH? <\/strong><\/p>\n

The disruptive effect of demonetisation is
\nundeniable in the short term. However, one
\nshould also understand that this move fits into
\nthe government\u2019s long-term vision. Modi\u2019s
\nadministration wishes to curb the \u201cblack
\neconomy\u201d and bring India into the 21st
\ncentury; and one way to achieve this is by
\nincreasing the role of banks throughout the
\neconomy. This is also one of the reasons why
\nthe unified tax system on goods and services
\nwas introduced at national level last July, replacing 15 different regional tax regimes.<\/p>\n

Of course the government\u2019s aim here is to
\nsimplify trade across the country, to increase
\nthe tax base and to clarify the environment for
\nforeign investors.<\/quote><\/p>\n

However the new unified tax regime remains
\ncomplex, involving several rates which differ
\nwhether applied to inputs or to final consumer
\ngoods. Many economic agents anticipated the
\nfiscal change, preferring to reduce their
\ninventories in order to limit tax discrepancies.
\nThis major countrywide fiscal reform
\ntherefore appears to have had a negative
\nimpact on output before July.<\/p>\n

HAS THE GOVERNMENT REACTED TO THIS
\nSLOWDOWN?<\/strong><\/p>\n

The government apparently expressed its
\nconcern over the most recent data published
\n(industrial output up 1.6% over one year,
\ndown from 7% in June 2016). It announced
\nseveral technical adjustments to the unified
\nGoods and Services tax regime. These include
\nexempting a number of companies,
\nauthorising the largest number to make
\nquarterly rather than monthly statements,
\nensuring that exporting companies with cash
\nflow issues can be reimbursed faster by the
\ntax authorities, and finally, reviewing the
\nprinciple whereby the client is accountable for
\npaying the tax when making a purchase from a
\nnon-declared company! <\/p>\n

However the government will do more than
\nsimply alter the enforcement of this symbolic
\nmeasure, which was only pushed through
\nafter endless legislative debates. It has also
\nannounced several measures designed to
\nsupport consumer spending in response to the
\ndownturn recorded in the most recent data
\nestimations.<\/p>\n

The government has indicated it would reduce
\ntaxes on petrol and diesel and is planning
\nspending increases for the next budget.<\/p>\n

In all likelihood, the upcoming local elections,
\nfollowed by the general election of 2019, are
\nnot unrelated to these announcements.<\/quote><\/p>\n

SO THE INDIAN ECONOMY SEEMS DRIVEN BY
\nA DIFFERENT MOMENTUM THAN THE REST
\nOF ASIA?<\/strong><\/p>\n

Indeed, while the IMF continued to review its
\ngrowth estimates upward for most Asian
\ncountries, the growth figures for India were
\ndowngraded (-0.5 point in 2017). The IMF is
\nnow expecting GDP to grow by 6.7% in 2017,
\nbefore experiencing a slight rebound in 2018
\n(+7.4%). It is important to remember that
\nIndia is rather closed to the outside world;
\nexports only account for 15.3% of GDP and
\nimportantly, only 19% of total exports are
\nwithin Asia. In comparison, over 36% of
\nChinese exports are shipped to other Asian
\ncountries and exports weigh a little over 20%
\nof GDP. India is therefore much more sensitive
\nto domestic demand; furthermore, farming
\naccounts for a considerable share of the
\ncountry\u2019s GDP (15%), which means the Indian
\neconomy moves according to its own specific
\npattern. This explains why the government is
\nkeen to support domestic demand.<\/p>\n

BUT BROADLY SPEAKING, HAVE THE POLICIES
\nIMPLEMENTED SINCE MR MODI CAME TO
\nPOWER BEEN EFFECTIVE?<\/strong><\/p>\n

A major success was the central banks\u2019 ability
\nto control inflation. After culminating at 12%
\nyear-over-year at the end of 2013, the
\ncountry\u2019s inflation-focused monetary policy \u2013
\nbased on a policy rate corridor and clear
\ncommunication – enabled consumer prices to rise 3.4% year-over-year in August. This also
\nled to the easing of monetary policy, which
\nwas needed to stimulate investment.
\nNevertheless, difficulties persist in extending
\nthis policy to the real economy. The interest
\nrates applied to companies remain high,
\nparticularly those charged by public sector
\nbanks, most affected by the accumulation of
\nbad debt. The latter account for 7% of total
\nbank assets and rose 60% in 2016, in just
\ntwelve months! According to recent
\nannouncements, the government is
\nconsidering further recapitalising some of the
\ncountry\u2019s public banks. <\/p>\n

Another undeniable success was the reduction
\nof the country\u2019s current deficit. This was
\ninitiated in mid-2013, but has lasted, despite
\nrising energy prices and their unfavourable
\nimpact on importing countries. Opening up to
\nforeign investors by easing administrative red
\ntape has meant that most of the current
\ndeficit \u2013 2.4% of GDP at end June 2017 \u2013 has
\nnow been \u201ccovered\u201d thanks to the net rise of
\ndirect investments, thereby vastly improving
\nthe sustainability of the country\u2019s external
\nfunding. <\/p>\n

TO SUMMARISE, IS IT WISE TO INVEST IN
\nINDIAN EQUITIES TODAY?<\/strong><\/p>\n

It seems to us that the current environment is
\na little less favourable that it is elsewhere in
\nAsia. While the demonetarisation and the
\nunique Good and Services tax are transient
\nand ultimately positive factors for the Indian
\neconomy, we believe the declining demand
\nfor credit, the situation of banks – and
\nparticularly how they will manage the sharp
\nincrease in bad debt, will reduce the
\nprobability of a fast recovery in economic
\ngrowth. In light of these factors, the shortterm
\noutlook for the Indian stock market is
\nrather less favourable.
\nWe are therefore underweight on India within our CPR GEAR
\nEmergents strategy relative to the MSCI
\nEmerging index.<\/quote>
\nHowever, opportunities for a
\nreturn to the market may arise at the end of
\nthe year, or early in 2018, considering the
\ncountry\u2019s rather positive fundamentals. We
\nare also encouraged by the upcoming
\nelections – as these periods tend to be
\nassociated with stimulus measures – but also
\nby the magnitude of the correction that has
\nalready impacted the market.<\/p>\n","protected":false},"excerpt":{"rendered":"

According to Laetitia Baldeschi, Co-Head of Research and Strategy at CPR AM, their equity managers are therefore underweight on India within their CPR GEAR
\nEmergents strategy relative to the MSCI Emerging index.<\/p>\n","protected":false},"author":20,"featured_media":66766,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1480],"tags":[1655,1651,2087,1877,2068,2239],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/66768"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/20"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=66768"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/66768\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/66766"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=66768"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=66768"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=66768"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}