The general public, view economic contractions as disasters. In a noisy democracy like ours, made worse by the hyper-active 24*7 television news channels and social media, negative news get magnified and a slowdown becomes recession, depression, disaster. The fact is that economic expansions and contractions are normal. There are many theories in economics that explain business cycles. The reasons for economic expansions and contractions can be different at different periods of time. Presently we are going through a normal economic slowdown.
The slowdown is worse than expected
It is a fact that the present slowdown is much worse than expected. It is a fact that almost everyone including institutions rich in economic talent like the IMF and World Bank, and our own CSO and RBI got their growth projections for FY 20 wrong. Growth rate got revised from around 6.9 percent at the start of the year to 5 percent now. A steep downward revision indeed! A combination of factors – the lagged effect of the banking crisis resulting in stress in the financial system, the NBFC crisis, recession in automobiles and real estate segments, poor exports, weak monetary transmission – all combined together to push the growth rate down.
More reforms in the offing
The government has responded with a series of measures. The bold corporate tax cut, relief to real estate, automobile and MSME segments, National Infrastructure Pipeline are all steps in the right direction. More reforms are likely in the Budget 2020. There is no room for a big personal income tax cut, but it has become inevitable after the corporate tax cut.
Capital market taxation is likely to witness reforms with tweaks in DDT and LTCG tax. Strategic disinvestment is desirable and crucially necessary at this point in time. This is almost a certainty in the budget. For achieving strategic disinvestment goals, it is important that the capital market stays buoyant. Therefore, bold capital market taxation reforms are likely in the budget.
Liquidity support from FPIs and domestic investors and expectations of the economy turning around are likely to keep the market buoyant. In the short-term, a lot depends on what the FM delivers in the budget; but a durable bull market will emerge only when growth and earnings revival resume.
Investors are advised to continue with SIPs/ STPs. During the last three to four months we have been advising our clients to invest with additional weightage to mid-caps. This strategy has started yielding results. Conservative investors can invest in balanced advantage funds.