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Event update: India Economy - Weakness continues, hopeful of recovery in H2FY20

Recently released economic data further corroborates the ongoing weakness in the Indian economy but there are indicators or rather actions pointing to a probable recovery in H2FY20:

1. a) Q1FY20 GDP growth came in at 5%yoy, a 6 year low. On value added side, weakness was led by agriculture and weak manufacturing output and on expenditure side, private consumption and gross fixed capital formation lagged significantly. We believe reasons for weakness in growth are partly being addressed, hence expect H1FY20 to mark a trough in growth.
2. b) Tax collections continue to be weak but we expect interim RBI dividend flow to open up scope for increased government spend in Q2FY20. YTDFY20 (Apr-Jul 2019) indirect tax collections stood at 7%yoy growth, primarily led by accounting adjustment in Centre’s GST share for July. Direct tax collections are posting moderate growth at best. Consequently, FYTD20 overall expenditure growth stands at 6%yoy where majority of productive growth came in July in Capex. While this is a positive and sustained increase in expenditure for the rest of the year would be the key to growth revival
3. c) Non-food credit growth (ex NBFC) showed marginal sequential improvement in Jul-19 to 9.9% from 9.3%yoy in June - 2019. This improvement was led by credit o/s to services ex-NBFCs and personal loans. While pick up in ex-NBFC credit is a positive, a sustained trend here would be the key. We believe upfront recapitalization of PSU banks may provide some support here (with recent consolidation growth pick up may see some head winds though).

Outlook: The current growth slowdown is currently being led by four factors which is partly being addressed. These factors are:

1. a) Trade conflict led global manufacturing slowdown- While its hard to predict developments on trade conflict and its impact on global growth, we believe depreciation pressure on rupee will provide some comfort on export competitiveness,
2. b) NBFCs liquidity crisis which impacted MSMEs and consumption of high ticket items like cars hard: While RBI is continuing on the path of monetary stimulus, its also ensuring enough liquidity in the system, thus good quality NBFCs could continue to grow. Default by weak NBFCs continues to be a risk.
3. c) Weak government expenditure since Q4FY19: With RBI dividend bonanza near term government expenditure should find support, which should get the ball rolling
4. d) Lagged GST implementation and demonetisation impact on MSMEs and labour markets: While part of MSME related announcements may help here, but improvement of labour force participation rate still needs to be addressed for better economic growth

In light of combination of factors listed above along with expectations of reasonable Kharif output and weak base for H2FY20, we expect growth to exhibit recovery. While we expect the growth trajectory to turn upwards, pace of recovery would depend upon how all recent stimuli pan out along with possible strength in government expenditure for rest of FY20, without which a durable strength would be missing. Hence, we expect widening pressure on deficits (trade and fiscal deficit) that could weaken INR/USD further to ~Rs74/USD over the next few quarters. We expect RBI to allow this depreciation to happen