FREE

India Strategy: What's moving on the ground, June 2018 - Domestic fundamentals continues to strengthen

We believe the Indian economy is exhibiting a transition from weak domestic fundamentals to strength. On a 6mma basis, overall digital transactions (adjusted to derive economic activity) grew at a strong 19%yoy. Although transactions data for the last two months is weak on a strong base, underlying economic transactions growth remains strong, hence we are not worried about the blip (we would review our call if we see further weakness in transaction numbers). Moreover, we believe the economy is geared for a high-growth trajectory, with most drivers in place; these being a) recovery in domestic manufacturing and construction, b) strong FY19 outlook for rural consumption, after a prolonged lull, c) 10.7% growth in outstanding non-food credit, d) expected bounce back in earnings growth, e) NPA recognition cycle nearly ending and f) a pick-up in capacity utilisation, which should be a precursor to private capex revival. On IDFC’s ’What’s moving on the ground scorecard’, the Indian economy has shown sequential improvement. The economy did witness weakness yoy on our scorecard but that’s because last year (in June) GST was yet to be implemented and growth had not bottomed out. We would, however, watch out for any adverse movements from stronger commodities and globally rising yields on the external front. Based on our analysis of entire spectrum of data, this report highlights 10 trends playing out in the Indian economy, inferred as cases of sustained trends and those that are turnaround/inflection points

• Macro-economic fundamentals - Domestic strong but external remains a threat: The key pillars of domestic economy are exhibiting strength as seen from a) bottoming out of GDP/GVA growth, b) improving tax collection, c) robust growth in transactions on a 6mma basis and d) improving velocity of money. Hardening core inflation, strong commodities and a depreciating rupee remain areas of concern
• Fiscal numbers - Apr 2018 opens on a positive note: Robust indirect tax collection, serious front-loading in capex and a fiscal glide path, in line with previous years - looks encouraging so far. However, it would be too early to call out a trend and we remain cognisant of possible fiscal pressures.
• Credit growth – Recovering but hardening yields not a deterrent: Outstanding non-food credit growth of scheduled commercial banks (SCB’s) is finally picking up, with recovery in the services sector and continued strong offtake on the personal credit front. However, bond yields too have hardened in response to rising core inflation, commodities and fiscal concerns. Hardening yields, we believe, is not a deterrent, as we expect demand in the economy to gather pace and demand to recover.
• FPIs withdraw from emerging equity markets making liquidity scarce; in that scenario markets would reward earnings performance and punish non-performers: Liquidity in the equity markets is scarce, evident from weak FPI flows. Though domestic institutions and SIP flows provide support, outflows outweigh inflows. Lack of liquidity would result in de-rating of non-performers, while the stocks with strong earnings trajectory would outperform (please refer to “Playing gems and riding horses”). 
• Consumption - Rural to outpace urban: In FY19, we expect rural to outpace urban consumption (If the next few months pan out in line with our expectations), driven by 1) bumper crop in FY18 (both Kharif and Rabi included), 2) government’s strong focus through a) MNREGA, b) possible MSP hikes, c) construction of rural roads, etc (given this is a pre-election year), 3) Normally progressing FY19 monsoon and inline kharif sowing (so far). We already see a reflection of improving rural consumption from improving vehicle and FMCG volumes, etc.,
• Industry and trade finally on the way to recovery: a) IIP and core industries showing strong growth on a 6mma basis, b) GVA manufacturing and construction exhibiting turnaround and c) average traffic growth on roads is up and d) NPA recognition is nearly complete. Consequently, we expect a rebound in corporate profitability with a higher growth trajectory from here onwards.

·      Private capex shows early signs of recovery: a) Improving demand environment, 2) pick up in capacity utilisation and c) accelerated NPA recognition seem to create an ideal ground for recovery in private capex. We finally expect to see reversal in private capex trend, which was so far led government.