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India Strategy: Weakness across segments continues

Recently released economic data further corroborates the ongoing weakness in the Indian economy which is showing no signs of abating so far:

1. a) Jun-19 core-industries growth came in at 0.2%yoy with a weak moving average trend and 3 year CAGR growth at a mere 3% (for the month). Only 2 out of 8 industries are exhibiting signs of strengthening on a moving average basis
2. b) Tax collections continue to be weak thereby constraining spending. YTDFY20 (Apr-Jun 2019) indirect tax collections fell 4%yoy with direct tax collections posting moderate growth at best. Consequently, FYTD20 overall expenditure growth stands at mere 2%yoy with 28%yoy decline in capex and 15%yoy decline in expenditure by rurally & socially focused ministries (implying weakness in PM KISAN payments). Consequently, overall cumulative FYTD20 fiscal deficit utilization stood at 61%, better than last two years
3. c) Non-food credit growth (ex NBFC) has continued came off in last 4-5 months to 9.3%yoy in June - 2019. Sectoral breakup disappoints further as services ex-NBFCs posted 5.7%yoy growth in credit o/s against a high of 20%yoy growth in Nov-18.

Outlook: The economic weakness seems to continuing as indicated by abovementioned data points along with weakness in other high frequency indicators like IIP, vehicle sales, air passenger growth, petroleum products consumption etc. As key pillars of the economy, namely – consumption, investments and exports, continue to struggle, we believe the government response by means of fiscal push, is extremely important. However, on the contrary, continuing weakness in expenditure by government may further delay the recovery.  Nonetheless, we eventually expect PM-KISAN dole outs and other government expenditure to pick up – thus giving rural consumption a boost. Moreover, we expect widening pressure on deficits (trade and fiscal deficit) that could weaken INR/USD to Rs72-73/USD over the next few quarters, in our view. We also believe expeditious redressal of frictional liquidity deficit will aid transmission of earlier easing by the RBI, enabling credit delivery by banks. At the moment, procyclical tightening of credit standards for bank lending to NBFCs and tightening regulatory norms for sector are proving to be major challenges. Ringfencing of good quality lenders from a potential contagion will be crucial in instilling confidence for India’s BFSI sector.