FM Nirmala Sitharaman Inherits an Economy Facing a Number of Headwinds - Views on News from Equitymaster

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  • Jun 4, 2019 - FM Nirmala Sitharaman Inherits an Economy Facing a Number of Headwinds

FM Nirmala Sitharaman Inherits an Economy Facing a Number of Headwinds

Jun 4, 2019

A former defense and trade minister, Nirmala Sitharaman became the first woman finance minister of India after Indira Gandhi.

She has inherited an economy facing a number of risks.

She faces immense challenges as finance minister. India's economy is starting to splutter on the back of a slow-down in consumption and private investment.

Fixing this and jump-starting the economy are the first order of business.

The data released on Friday was disappointing at different levels.

Lower growth in GDP, stagnant growth in core sector in April 2019, and the government just about managing the 3.4% deficit number in FY19 pose puzzles for the new Cabinet which assumes responsibility of kick-starting the economy.

A look at key macroeconomic indicators presents a gloomy picture.

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Sinking GDP Growth Means FM Nirmala Sitharaman has to Push for Sweeping Reforms

According to the data released by the Central Statistics Office on Friday, gross domestic product (GDP) grew by only 5.8% in the last quarter of financial year 2019 (FY19), between January and March.

GDP Growth Slips to 5-Year Low

The data demonstrates GDP growth slowing steadily, from 8 to 7 to 6.6% in the first three quarters of FY19.

The signs of slowdown are visible throughout the economy.

Growth of Core Sector Industries Remained Flat

India's core economy grew at 4.3% in FY19, its second slowest pace in the past 5 years, down from 4.9% in FY15, according to latest data by the ministry of commerce and industry.

The 8 core industries include Coal, Crude Oil, Natural Gas, Refinery, Fertilisers, Steel, Cement, and Electricity.

8 Core Sectors Report Flat Growth in FY19

The growth rate is also flat since fiscal FY18 which had also recorded a 4.3% growth.

Manufacturing and Services Sector Activity Decelerates

Core sector growth will have a direct impact on the Index of Industrial Production (IIP) as these sectors account for a major chunk of total factory output.

Worries Rise as Factory Output Shrinks in March

The Index of Industrial Production (IIP) and the Manufacturing Purchasing Managers' Index (PMI) are used to gauge the level of activity in the manufacturing sector.

What Does the PMI Say?

The country's manufacturing sector performance fell to an eight-month low in April as new business growth moderated, curbed by the elections and a challenging economic environment.

The Nikkei India Manufacturing Purchasing Managers' Index declined from 52.6 in March to 51.8 in April, reflecting weakest improvement in business conditions since August 2018.

However, this was the 21st consecutive month that the manufacturing PMI remained above the 50-point mark.

In PMI parlance, a number above 50 means expansion, while a score below that denotes contraction.

The April PMI data indicated a softer increase in new orders had restricted growth of output, employment, and business sentiment.

Further, the Indian service sector lost momentum in April, with rates of new business and output growth both cooling to seven-month lows.

Indian Service Sector Loses Momentum Too

Falling from 52.0 in March to 51.0 at the start of FY19, the seasonally adjusted Nikkei India Services Business Activity Index pointed to the weakest upturn in output since last September.

Besides these, there are many other indicators of a slowdown.

A decline in consumer demand, a slowdown in government spending, and weak private investment have likely impacted India's growth in the fourth quarter.

One such high frequency indicator is automobile sales.

What do these numbers indicate?

Vehicle sales are a very important economic indicator about how the people of India feel about their economic prospects.

After all, no one is forcing anyone to buy a car and given that if a consumer buys a car, he chooses to make a down payment and/or take on an EMI.

This is only possible if the consumer is feeling positive about his future economic prospects.

Automobile Sales Skid as Demand Remains Sluggish

On Saturday, India's largest carmaker, Maruti Suzuki, reported a 22% decline in sales in May, the lowest in seven years.

Other auto-makers such as Tata Motors, Eicher Motors, and Hero Moto Corp reported declines in sales too.

All these economic indicators basically provide evidence of the Indian economy slowing down further since January 2019.

Another major area that needs immediate attention by the government, is job creation.

According to a CMIE survey, the unemployment number stands at 41 million people. That is too big a number to be ignored.

Now, job creation at such a mass level won't be a walk in the park. To set the wheels in motion, the government will have to look at infrastructure spending.

Capacity expansion in new projects has seen a gradual slowdown in the past few years.

Infra Capacity Expansion Likely to Be the Key Focus of the Modi Government

Infra Capacity Expansion Likely to Be the Key Focus of the Modi Government

From Rs 3.3 trillion in June 2018, the number has come down sharply to Rs 2.1 trillion as of March 2019.

Co-head of research, Tanushree Banerjee believes this is first area the government will look to focus on.

Apart from creating jobs in the infrastructure sector, it opens a lot of other avenues.

Here's an excerpt of what she wrote in The 5Minute WrapUp:

  • Better infrastructure will mean better connectivity to non-metros. This will attract manufacturing companies to set shop in these towns. It will give a boost to the urbanisation of the population.

    This is a trend I see clearly playing out in the coming years.

    Infrastructure spending -> Improved roads -> Increased two-wheeler sales.

    It is just one of the 50 irreversible trends I believe will carry the Sensex to 1,00,000.

Typically, when the capacity utilisation rises, it prompts companies to expand their capacities. If this gradual pick-up sustains, it could lead to a pick-up in private sector investment.

Thus, a revival in the investment cycle could be underway despite the current economic slowdown.

And, as far as equity markets are concerned, participants were expecting a weak fourth quarter growth data.

As such, the now published data may not weigh on the market but will raise expectations from the government and the RBI.

The pressure points in the form of finance, tax rates, infra expenditure, specific sector-related policies etc, must be addressed.

While the weak GDP data will be an important input for the Union Budget.

Most investors are now keen to know what's in store in the first week of July.

Warm regards,
Rini Mehta

Rini Mehta

Rini Mehta is a keen follower of the stock markets and economy. At Equitymaster, she covers daily stock market moves and broader market trends across Indian and global markets.

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