Much like the monsoon, the rally in the markets has brought some relief. And even if rains a little less, it?s unlikely to hurt the harvest. Indeed, although inflation is unrelenting, positive real wages are keeping the consumption story a strong one.
Private consumption is therefore likely to hold up and since the fiscal deficit for this year is now estimated at around 5.5% of GDP, there should be support from government spending too. Deutsche Bank economists estimate that while the growth in consumption this year, as a whole, could taper off to about 7.5% from 8% last year, the private consumption piece could grow by about 8% which is roughly 60 basis points lower than the rate at which it grew last year.
There?s enough evidence now of flagging sales of consumer durables, but that fortunately accounts for a small share of the IIP, the larger share is accounted for by staples. After a long period of underperformance, consumer staples are growing at a slightly better pace and that, together with an easing in prices of key inputs, is probably what is sending FMCG stocks to their lifetime highs. With nominal wages expected to go up and inflation expected to go down over the next year or so, wage earners should have more in hand. So we can bank on consumption to bail out the GDP once again this year while we wait for investments to pick up. If only it was the same for the US economy. The December 2010 quarter saw a spurt in consumer spends, of an annualised 4% bringing hope, in the season of Yuletide, that the economy was back on track. But high prices of food and commodities and unemployment has left consumer spends at anaemic levels; moreover, about a third of homes today are worth less than the value of their mortgage. So, although corporate results for the March earnings season were stunning with IBM, Intel, Qualcom, Apple, Citigroup, Morgan Stanley and General Electric all topping consensus estimates and analysts rushing to upgrade estimates.
Federal Reserve chief Ben Bernanke has now lowered growth forecasts for both this year and next. More fiscal stimulus is unlikely to be forthcoming but easing crude oil prices should definitely boost consumption in the US.
Of course, the impact that falling crude prices on the Indian economy can be much more positive than it could be for others because consumption is already strong and lower inflation will stimulate spending. So assuming crude oil prices don?t flare up again, and prices of commodities too come off, the consumption story will continue to play out. Morgan Stanley did not upgrade India from underweight when it last re-looked country weights a few days back possibly because the investment cycle is yet to turn and for corporate earnings to grow at a sustainable pace, that is critical. Foreign institutions may have started nibbling at Indian equities again but the quantums of buying suggest they?re in no hurry to add exposure. That?s justifed given that benchmark bond yields are ruling at around 8.3% and that a repo of 8% doesn?t seem unlikely. So, the rally could fizzle out but it will be back again. As will the rain.
