India’s Recovery – 5 Areas to Watch

Companies should monitor the following areas to determine where India is headed:

1.       Interest Rate Cuts – One of the reasons we saw a small uptick in growth is because interest rates were cut in April which definitely impacted Q2 numbers. We need to see if the central bank is going to cut the interest rate again – if it does then we can expect growth to be higher than 5.5% for H2 2012

2.       Inflation – While headline and non-food inflation have fallen, retail (and food) inflation remain at stubbornly high levels for now. That is one of the reasons the central bank has been hesitant to cut any rates. Food inflation is a structural issue in India – a supply side issue caused by lack of infrastructure that leads to about 30-40% of all fruits and vegetables to rot in inadequate storage facilities- so until this is completely fixed – cutting interest rates is not really going to do much good

3.       Parliamentary Debates on Reform – This is extremely important. We need the politicians to begin to restart conversations on the many bills that are surrounding several of the reforms (including land-reform, tax reform, multibrand reform) etc. A new corruption scandal has not led to any real debate taking place in the parliament which means that true reforms are likely to be delayed further – so we can’t expect a full recovery until that happens

4.       Exports – While the rupee has fallen in value, so has demand from the west – so we need to understand whether or not exports are truly doing better – and for that – we need to wait for more detailed numbers. If export picks up, there might be some small relief but one has to keep in mind that India’s GDP is mostly based on domestic consumption (almost 60% of it)

5.      Monsoon – If monsoons turn out to be horrible – we will see the agricultural sector suffer and that will have a further negative impact on the growth figures

Overall I would say that since the GDP growth for H1 is around 5.4%, these are some of the things that need to happen:

1.       In order to meet the government target of 6.7% growth = India needs Q3 and Q4 to see growth of 8% – I highly doubt this will happen

2.       In order to meet the central bank target of 6.5% growth = India needs Q3 and Q4 to see growth of 7.6% – tough but possible

3.       In order to meet the FSG target of 6.3% growth = India needs Q3 and Q4 to see growth of 7.2% – tough but possible

Is the worst over? Assuming nothing changes from now until December, I personally expect India to see growth of 5.3-6% for the year so Q3-Q4 numbers need to be in the range of 5.8-6.3% – so yes they might be better but still VERY weak (given that a year ago, we saw GDP grow at 9%)

 

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