In this post I share my views on the state of the economy under Modi govt after over 4+ years of rule.
In my earlier post in February when the USD/INR was still below 65 I had warned that we will see a large move to 69 this this year. In the past 7 months, things have played out as expected and the Rupee has fallen to unprecedented levels even beyond my initial expectations.
Now that we have had a huge technical breakout above 69 for the USD/INR, this opens room for move to 75 in the near term and 80 by next year.
While Indian Rupee has often seen such sharp move once in a few years which is then followed by a long consolidation phase, the selloff can have nasty short term implications.
RBI has already hiked interest rates twice in last 2 months even when inflation remains largely in control. A free fall on the currency may force its hand to do even more hikes.
Anyways, if the 10 year Govt bond yield be taken as an indicator, it is trading at 8.13%, which is 163 bps higher than the RBI base rate. This difference was under 50 bps around Oct last year with yields under 6.5% with base rate at 6%. So I believe RBI has little choice but to follow the rising yields and continue with further interest rates hikes in coming months. This should make loan EMIs for all of us in times to come.
Most govt banks continue to report losses as per their latest Q1Fy19 earnings announcements. Although they claim that worst of NPA recognition is behind them and there should be recoveries of bad loans in near future, i still believe sustainable profitability and growth is still few quarters away for them.
While we are still to recover from the corporate loan crisis, several industry voices including the former RBI governor Raghuram Rajan has warned against risks associated with Mudra loans as well. I also believe that reckless lending to any segment without proper due-diligence just to meet lending targets set by the govt can have disastrous consequences in the future.
Our trade deficit hit a 5 year high of $18 billion in July and came in at $17.4b for August. This is fast approaching same as the levels of $20b we saw at the peak of 2013 crisis but at that time oil prices were above $100 a barrel compared to $77/barrel today. Last time around chief culprit were gold and oil, this time it is oil and electronic goods imports.
On one hand imports rising, on the other we are doing poorly on exports. Pharma and textile exports have done poorly in last few years.While pharma companies have struggled with compliance issues and falling generic drug prices which have hurt revenues and profitability of almost every major player in last 3 yrs, textile exporters are facing challenges because of decline of large global retail chains. Even as a stock investor I continue to stay totally away from stocks of these two sectors.
The poor implementation of the half baked GST has added seriously to woes of exporters with large amount of working capital getting struck in wait for input tax credits. The costs of compliance have also increased sharply. All these have led to massive job losses in hundreds of thousands .
While the government celebrates what it terms as formalization of the economy, in reality it has mostly destroyed small businesses and consolidated the market-share of bigger and stronger players.
When Demonetization was initially announced, intellectuals had claimed that it will wipe off Rs 3 trillion rupees of black money in one go. However now that the RBI has given official figures stating that 99.3% of all the existing notes came back after DeMon, it has delivered such claims a massive blow. The govt instead of having a windfall gain of trillions ended up causing massive economic damage.
In the 12 months from Q3FY17 to Q2FY18, GDP growth rates crashed to low of 5.6% from pre DeMon level of 7.6%, resulting in 4 straight quarters of sub 7% growth. So if conservatively assuming that GST & DeMon slowed the economy by 1% on average over these 12 months, i believe the economic loss of 1 % to a $2.5 trillion GDP comes to $25 billion or 1.6 trillion INR taking USD/INR at 64.
Even though the govt claims that digital transactions have increased, or shell companies have been identified, or tax compliance has gone up, all these could have been achieved using other ways as well without causing such huge massive economic damage. On top of it all, DeMon was a massive human tragedy as well which caused a massive suffering on poor and vulnerable sections of the society leading to about 100 deaths by some estimates. See link for DeMon deaths.
Anyways, after the horrors starting DeMon and GST, even sustained 8% growth will be a big miracle. Although we hit 8.2% growth rate this past quarter, but as i have said in my twitter posts as well, i do not take it seriously as it is only because of low base effect and I strongly believe growth rates in coming quarters will be close to 7%.
Even looking at the 4 year performance of the current govt, GDP growth has been extremely disappointing with average of just 7.3% compared to 8.1% in the 10 yrs of UPA according to the new series data. The average growth rate under the current govt is even lower than the 7.7% growth rate we saw in UPA 2.
FISCAL AND CURRENT ACCOUNT DEFICIT-
The present govt has struggled to bring down the fiscal deficit. Last year they badly missed their own targets. This, even after they have extended a few times the timeline by which they intend to finally get to the long term target of 3% of GDP.
Even the current account deficit which was largely under control for last few years, is now expected to surge massively this fiscal.
On top of that, govt policies like LTCG tax and unpredictable diktats of SEBI have also caused foreign investors to sell massive amounts of Indian stocks and bonds. This has led to our foreign reserves falling below USD 400 billion as per latest RBI data.
While I was optimistic about the prospects of this govt in initial years (see earlier blog posts), I have been very disappointed how things have progressed in last two years and am extremely worried about what the future may hold for us.