Will India's economy stabilise in 2020?

Nicholas Earl, 10/02/2020

India’s economy will gradually recover in 2020 from the short-term disruptive impact of structural economic reforms, according to Ocean Dial Asset Management’s chief investment officer, David Cornell.

Commenting on the latest announcements made by India’s finance minister Nirmala Sitharaman at the annual Union State Budget on 1 February, which include a lower corporate tax rate of 15 percent, Mr Cornell praised the government for its incremental approach to spending and its emphasis on sustainable economic growth.

He explained: “As has been the case since BJP came to power the government continues to focus on macro-economic stability, the key pillar for achieving long-term sustainable economic growth, and steering clear of short-term fixes: rightly so.”

He also offered his thoughts on the perceived hesitance of Prime Minister Narenda Modi’s BJP-led government to significantly increase spending, even after its success at the ballot blox last year.

Mr Cornell said: “Unwillingness to provide stimulus also stems from the confidence the government appears to have in a gradual economic recovery. Much of the slowdown has been caused by structural but short-term disruptive reforms aimed at resetting the Indian economy for the long haul. As the disruptive impact of these reforms wane and the benefits of looser liquidity emerge, we share the government’s confidence in a gradual economic recovery over 2020, ceteris paribus.”

Alongside the introduction of a lower corporate tax rate of 15 percent, the government also announced the full privatisation public sector bank IDBI, an increase in the Foreign Portfolio Investor (FPI) limit on corporate bonds from nine percent to 15 percent, and a 100 percent tax exemption for Sovereign Wealth Funds on income from investments in infrastructure.

Despite his qualified support for the government’s economic agenda, Mr Cornell did call into question the status and significance attached to the yearly budget.

Describing India's budget as Tamasha, a Hindi word that can either mean a “grand show” or a “commotion”, he felt that it was not especially relevant to the country’s capital market perspective. In particular, Mr Cornell said that economic reforms are increasingly carried out any time of the year outside the budget, and that changes in the much-discussed GST rates were not even included in this year’s announcement.

In his commentary on the announced plans, he explained: “Ceremoniously, market participants and the business world line up a plethora of sops and incentives that they desire from the Finance Minister.”

Despite a supposed focus on a higher fiscal deficit through personal tax cuts or higher spending, Mr Cornell believed that the government was likely to remain cautious.

He said: “Having slipped on the fiscal deficit front from a budgeted 3.3 percent of gross domestic product (GDP) and knowing in reality there is precious little wiggle room, the Finance Minister budgeted for a fiscal deficit of 3.5 percent in FY21.”

“As is usual, markets will move on and the budget will soon be forgotten. It is business as usual at Ocean Dial, as we stay focused on bottom-up stock selection,” he added.

Despite his criticisms of the budget’s relevance, Mr Cornell believed that the government’s assumption of a nominal GDP growth rate of 10 percent for the financial year (FY) of 2020 in the budget was “reasonable”, when taking into account a real GDP growth of six percent and inflation at four percent.

He also offered a few passing thoughts on the coronavirus.

“Indian equities have so far been reasonably resilient to the 2019-nCoV crisis which we hope will prove to be a short term phenomena,” he said.

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