Looming large on the political horizon of India today are many large clouds- unfortunately, most of them very dark. For almost the entire winter session, the Parliament’s working was paralysed. Adding to the 2 G spectrum scam, more and more skeletons started falling from the closet. The Radia tapes, bribe for loan scam, allegations of price manipulation in some small/mid cap stocks… all combined to make the national scene, indeed, dismal. But, to the discerning viewer, there is reason to cheer. There are some silver linings amongst the dark clouds. This article looks at some of them.
Contrary to news from the political front, some of the economic news is positive and reassuring. India’s GDP grew by 8.9 percent during the 2nd quarter, surpassing most expectations. With the Q1 GDP also getting revised to 8.9 percent, a full year growth rate of more than 8.5 percent now appears in the realm of possibility. Seen in the context of sluggish growth in the US, Euro zone and Japan, this is indeed remarkable.
The IIP data for October added to the cheer with a growth rate of 10.8 percent. The cumulative average growth for April-October 2010 now stands at 10.3 percent compared to 6.9 percent for the same period last year. Manufacturing growth of 13.3 percent was all the more remarkable and 22 percent growth in capital goods is a positive leading indicator. The robust 31 percent growth in consumer durables points to the sustaining domestic consumption story.
On the price front too, things are looking up. Head line inflation declined to an 11 month low of 7.48 percent. Even though the high base effect has contributed to this moderation, this is welcome news. Declining trend on the price front will give the RBI the much needed room for manoeuvre in managing capital flows and formulating growth stimulating monetary policy.
Meanwhile, the indirect tax collections till November are up by 50 percent compared to the same period last year. This, along with the continuing buoyancy in direct tax collections, will ensure that this year’s total tax collections targets are easily exceeded. This can be a shot in the arm of the finance minister in his attempt to contain the fiscal deficit.
In spite of these positive developments on the macro economic front, there are some areas of concern. Foremost among them is the current account deficit which currently stands slightly above 3 percent. This deficit, which is presently manageable, can spin out of control if crude shoots beyond $100. Crude at $100 can also reverse the moderating trend in inflation. Of course, our economic managers are competent to ensure that we don’t slip on oil.
Stock markets are likely to trend up starting Jan 2011 aided by the increasing FII allocations expected next year. Growth and earnings prospects in the Developed world are likely to remain subdued for at least 2 to 3 years. In contrast, prospects for Emerging markets, particularly India appears to be bright. Major dips in the market caused by short term negatives, therefore, may be used as buying opportunities to accumulate quality stocks.