The next government may have its task cut out to revive flagging economic growth. We believe a combination of monetary stimulus and structural reforms may help revive growth over time.
The weak volume growth reported by consumer staple companies in Q4, FY19 underlines the slowdown seen in housing over the past five to six years and automobiles over the past year. The next government may have its task cut out to revive flagging economic growth. We believe a combination of monetary stimulus and structural reforms may help revive growth over time. The current slowdown may not be a mere cyclical one, as is generally believed.
Pattern of consumption slowdown is disturbing
An analysis of macro (household savings data) and micro (sector and company volume data) suggests that households may have gradually reduced consumption due to insufficient income growth. In our view, lower property purchases by households over FY2013-18 (as can be seen in household physical savings), sustained consumption (household physical savings rate partly replaced by consumption) for the past few years before possible low household income growth sapped consumption also, as can be seen in the current slowdown in demand for both discretionary items and staples, could be a reason.
Houses, auto & general consumption slowdown
We note that housing demand has been weak for the past several years and property prices broadly stable. The overall expenditure (savings) on residential real estate is down meaningfully, which is amplified as a larger decline in household physical savings rate in national savings data as the base (nominal GDP) has grown over this period. Auto sales volumes saw a slowdown from 2HFY19 and general consumption (at least based on volumes of consumer staple companies) from Q4FY19.
Growth revival will be key for the next govt
The priority of the next government will be to revive economic growth although the macro-economic set-up is not very favourable. India’s high and persistent fiscal deficit, faltering tax revenues, broken business models in agriculture and infrastructure rules out further fiscal stimulus. We see scope for a greater monetary stimulus (100 basis points (bps) rate cut and 100-200 bps CRR cut) in the context of manageable inflation but the RBI may be reluctant to change course so drastically.
The central government may want to focus on reforms in factors of production including labour and land and the role of government in business, including privatisation of public sector undertakings and review of extant ownership and pricing policies, to encourage greater foreign direct investment (FDI) and private investment in the critical infrastructure sector.
India may also want to increase the foreign portfolio investment (FPI) limits for government bonds in order to increase inflow of foreign capital (savings) to make up for the decline in domestic savings. In our view, a combination of the three (not just one or two) can kick-start economic growth.
Improving outlook for banks a positive
We note that increase in financial liabilities of households and related decline in net household financial savings have also supported household consumption over the past two to three years. The liquidity problems of non-banking finance companies (NBFCs) in general and possibly solvency challenges of certain housing finance companies (HFCs) in particular may further dampen credit growth and consumption demand.
Nonetheless, we note that the ongoing improvement in the balance sheets of banks can support overall credit growth by offsetting NBFCs’ likely lower loan disbursement.
Edited extracts from Kotak Institutional Equities Research report