Can India withstand global growth slowdown?

In the press briefing after announcing the 75 bp rate hike, Fed chief Jay Powel said, “no one knows where the US economy will be one year from now.” This candid statement reflects the uncertainty surrounding the growth prospects of the world’s largest economy, and, thereby, the prospects of the world economy in the short term.

Also, there is no consensus on whether the US economy will slip into recession.  The majority of economists and market players believe that this rate hiking cycle by the Fed, taking the terminal rate to 3.8 percent in 2023, will tip the US economy into recession. Also, there are many who believe that the Fed might succeed in soft landing the economy even while hiking rates to contain inflation. In brief, the element of the ’unknown’ is very high.

However, it is known that the US economy will slow down substantially, and this will impact global economic growth. As the global economy slows down, some economies will outperform, and others will struggle. The important questions are: ‘Can India outperform?’, ‘Can Indian market decouple from other markets?

Tax buoyancy reflects a strong rebound in growth

The Q1FY23 advance direct tax collections surprised on the upside. The sharp 48 percent growth in tax collections reflect rising expectations of the corporate sector and individual taxpayers for FY23. GST collections crossed 1.4 lakh crores in May for the third month in a row and for the fourth time since GST came into existence. A sustained rise in GST reflects robust economic activity.

IIP grows by 7.1 percent in April

India’s industrial output as measured by IIP grew by 7.1 percent in April. Importantly, the capital goods segment grew by 14.7 percent indicating a pick-up in investment demand. If the momentum in industrial output sustains, India’s GDP growth target of 7.2 percent in FY23 (RBI) can be achieved.

India will be less impacted by a global economic slowdown

The major concern in equity markets globally is whether the aggressive monetary tightening by the Fed would tip the US economy into recession. There are optimists who believe that the Fed might succeed in soft landing the US economy. Whether that happens or not, it is evident that global growth will decline. The synchronized monetary tightening by most central banks of the world will impact growth.

Declining global growth will impact India’s growth too. But India will be one of the least impacted economies. India’s growth is driven primarily by domestic consumption, which is steadily improving.

FPI selling is the major headwind for markets

The major drag on the Indian market is the relentless selling by FPIs. It is important to appreciate the fact that FPIs are selling in most emerging markets, particularly in those like India where they are sitting on good profits. It is rational for FPIs to sell when dollar is appreciating, and US bond yields are rising.

Relentless FPI selling has opened excellent opportunities for long-term investors. Prices of many stocks have declined when their fundamentals are improving. For instance, the prices of high-quality financials, particularly leading banks have declined; but their profitability is steadily improving due to improving asset quality and rising credit demand. This anomaly in stock prices vis-a-vis their fundamentals is an opportunity for long-term investors.

Crude is crucial

The major headwind for the economy and markets is the elevated price of crude. Even though India’s macros are in reasonably good shape, elevated crude prices pose macro challenges. India’s food and fertilizer subsidy has ballooned to Rs 5.3 trillion threatening slippage from the fiscal deficit target of 6.4 percent. A rising fiscal deficit will worsen the current account deficit too bringing back concerns over the twin-deficit problem. On the other hand, if crude prices fall due to positive developments on the Ukraine war front, inflation will decline, and consequently, central banks can afford to be less hawkish than they are now. This can turn out to be a major tailwind for the economy and markets.  Therefore, the crude price needs to be closely watched.

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