Indian Indices Trade Near the Dotted Line; Energy Stocks Witness Selling

Tue, 17 Jan 11:30 am

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After opening the day marginally higher, the Indian share markets witnessed choppy trades and continued to trade near the dotted line. Sectoral indices are trading on a mixed note with stocks in the FMCG sector and capital goods sector witnessing maximum buying interest. Stocks in the energy sector and metal sector are trading in the red.

The BSE Sensex is trading down 38 points (down 0.1%) and the NSE Nifty is trading down 11 points (down 0.1%). The BSE Mid Cap index is trading up by 0.2%, while the BSE Small Cap index is trading up by around 0.5%. The rupee is trading at 67.99 to the US$.

The International Monetary Fund (IMF) lowered India's growth forecast for FY17 by a full percentage point to 6.6%. This comes as the IMF projects deceleration in India's GDP growth on the back of disruption caused by the government's demonetisation move. The earlier estimate of growth has been 7.6%. IMF also expects India's growth to pick up at a slower pace in 2017-18, at 7.2%, against its earlier estimate of 7.6%.

One must note that the government of India has pitched for a 7.1% GDP growth in FY17. This estimate is still below the 7.6% growth recorded in FY16.

We believe, FY17 GDP growth could be significantly lower than 7.1%. Growth in India has slowed down in the recent months. This was seen on the back of demonetisation. The government has not factored in the negative impact of demonetisation in the above 7.1% GDP estimate for FY17. This we say because the government did not have the data to do so.

On the topic of GDP growth, Vivek Kaul, our big-picture expert, isn't quite satisfied with the quality of GDP growth in the current fiscal. Something seems amiss. But after some adept number crunching, he seems to have got to the bottom of it.

Government expenditure, which is not sustainable in the long term, will drive around one-third of the increase in GDP in the current fiscal. Here's Vivek in one of the recent articles from the Vivek Kaul's Diary:

• The trouble is that this way of creating economic growth by the government spending its way out of trouble, cannot continue indefinitely. At the end of the day the government has a limited amount of money at its disposal. If India has to continue growing at greater than 7 per cent, then private sector investment needs to pick up and that doesn't seem to be happening currently due to various reasons.

In another news update, as per the latest United Nations labour report, India's unemployment level is set to rise through 2017 and 2018. The report pegs the unemployment rate at 3.4% in 2017-18, similar to current levels.

India's Unemployment Level to Worsen in 2017 and 2018

One shall note that India has been struggling with jobless economic growth since over a decade. According to the latest Economic Survey, annual employment growth in India was only 0.5% during the period 2004-12, while labour force growth was 2.9%.

However, there's high probability that the above projected numbers in the report are understated. As the recent edition of The 5 Minute WrapUp states...

• Given this history, we're not sure if the projected unemployment rates are realistic and reflect the full impact of the demonetisation drive. While Finance Minister Arun Jaitley has rebuffed worries about job losses and losses to businesses on account of demonetisation, we believe there are solid reasons to think otherwise.
  
  The note ban has hit India's informal economy very hard. And India's informal economy is huge...it is the largest employer. As per Bloomberg, the actual share of the informal sector in non-agricultural employment in India is 83.6%. Just to give you a sense, this number for China stands at just 32.6%.

The coming months will be crucial to evaluate the full impact of the demonetisation drive on the employment front. We will keep monitoring the ground realities and keep you updated.

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