India’s real GDP growth is expected to slide to a seven year low of 6% in FY20. RBI, which had projected India’s real GDP to grow by 7.2% at the start of the fiscal, has scaled down its forecast to 6.1% during the last six months. Many international institutions too have substantially revised downward their forecast for India, the worst being 5.8% by Moody’s.
Growth had started to slow down two years back due to global factors. The impact got bigger this year due to sharp deceleration in domestic demand in consumption and investment. Latest data shows job cuts in industries, particularly in auto, textiles, and gems and jewelry. Business environment has become unfavorable, as investment is hit by disinterest in capex due to policy issues and weak consumption. Capital investments by government has weakened due to its fiscal constraints. Government expenditure rose by 9.8% to Rs.11.8 trillion during April-August 2019. Revenue expenditure increased by 10.7%, while capital expenditure rose by a mere 3%. The government is likely to have a huge shortfall in tax revenue from fall in corporate tax and GST. Government plans to rectify this fiscal position by increasing non-tax revenue, through extra dividend from RBI and PSUs. And divestment through strategic sale of BPCL, BEML, SCI, Concor, others and tranches of Bharat 22 ETF. Anyways, it is going to be a mammoth exercise to achieve this fiscal balance.
Government had cut the effective corporate tax rate, with a hope that corporates will invest the savings in future capacities. However, it seems that most of the corporates will distribute these gains to the shareholders through dividends. They are unlikely to start investing till they see clear signs of improvement in consumer and export demand.
Even after factoring the benefit of ~10% reduction in corporate tax rate in Q2, Nifty50 preview shows flattish PAT growth of just 1% on YoY and 6% on QoQ basis. This is due to significant de-growth in auto, metal and telecom sectors. Finance, cement and pharma are expected to do better this quarter due to weak Q2 last year as a result of NPA problem, reduction in cement prices and price erosion in US pharma market. The strong performance in the Banking and NBFC is led by improvement in credit off-take and net-interest margin. Rise in cement prices and lower fuel costs are expected to benefit large cement companies. However, volumes are expected to be flat owing to economic slowdown and floods in different parts of the country. The pharma sector is expected to do better on account of price hikes in domestic market and lower price erosion in the U.S market.
The woes in the auto sector are expected to continue hit by lower consumer demand and bloated inventory. A combination of low commodity prices, weak demand, and above-normal monsoon is impacting metal companies. The I.T sector is expected to report muted earnings growth due to external macro challenges and increase in employee cost.
Earning expectations had improved post the corporate tax cut, but we are bearing downgrade in EPS growth, in the short-term. GDP growth is expected to recover to 7.0% to 7.5% in 2021-22, while EPS growth from H2FY19. A careful trend is expected to continue in the equity market during the short-term, while expectation builds-up for FY21 led by start of capex led by FDI and private consumption.