Risks To India’s Growth: Energy Imports, Quality Of Fiscal Spending, Tight liquidity conditions

Domestic resilience is expected to offset global headwinds

FinTech BizNews Service   

Mumbai, January 30, 2024: Baroda BNP Paribas Mutual Fund's "Konnection" - Annual Market Outlook: 2024, panel discussion was held on 23rd January 2024. Below is a summary of the discussion held at the event which saw participation from renowned industry leaders, who shared their views on key topics like the Indian Economy, Indian Equity and Bond Markets.

Session 1: Macros – Indian Economy; Global headwinds and Domestic opportunities

Speaker - Neelkanth Mishra, Chief Economist, Axis Bank

Key takeaways:

• India’s economy is poised for resilient growth, despite global headwinds. Domestic resilience is expected to offset global headwinds. One of the significant points highlighted was that India achieved growth despite continuing fiscal consolidation and monetary tightening, making it more sustainable.
• Increase in total factor productivity, expansion of modern services, investment in both physical and digital infrastructure, wider internet penetration, penetration of financial services etc. have been the guiding tailwinds for India’s resilient growth. 

Risks to India’s growth numbers can arise out of the below –

• Energy Imports – Upside on energy prices, would imply a higher import bill thus being a net drag on GDP.
• Fiscal indiscipline and quality of fiscal spending – In the medium term, fiscal indiscipline can be a risk to growth. Debt to GDP ratio has to be sustainable, with slower and gradual decline in fiscal deficit, so that there are no shocks to growth. Balance is needed as sudden reduction in deficit can hurt GDP growth, thus push up debt-to-GDP ratio due to less growth in denominator. Higher spending needs to be done on variable with higher money multiplier like infrastructure etc.
• Tight liquidity conditions - Near-zero effective money injection in an economy growing in double digits in nominal terms implies quantitative tightening. Tight liquidity has pushed the effective funding rate 25-30bps higher: effectively a rate hike would have implications on growth. 
• Global developments – Slowing global growth hurts goods and service exports. Cyclical slowdown is partly from goods, affecting freight, legal and financial services. Slow US job openings could also have near-term impact.

View on US- Economy, fiscal, monetary conditions:

• Fiscal challenges in the US have been a concern. With US’s receipts as % of GDP having already reverted to the pre-pandemic level, along with ballooning expenditure.  During election any pro-cyclical fiscal policy means the debt-to-GDP trajectory can be much worse. This means that the US must resort to financial repression, while it slowly corrects annual fiscal balances. Also, a repeat of an increase in deficit financing of 2023 appears difficult.
• Monetary Conditions - Due to quantitative tightening, money supply in the US is shrinking. Higher fiscal spending has propped up GDP growth in the US, but gap between USD M2 growth and GDP growth has deteriorated.  This suggest availability of dollars outside the US is a growing challenge even as money velocity rose with the increase in interest rates. This is likely to worsen in the coming months/quarters.

Session 2 – Indian Equity Markets: What lies ahead

Moderator - Govindraj Ethiraj, Journalist & Founder - The Core

Panelists - Gautam Duggad, Head Of Research, Director - Institutional Equities at Motilal Oswal Financial Services Ltd,  Mahesh Nandurkar, MD & Head of Research

Jefferies India Private Limited and Sanjay Chawla, Chief Investment Officer - Equity

Baroda BNP Paribas AMC

Key Highlights:

• Current equity valuations though elevated could be backed by sustained earnings growth in 2024. This is based on the assumptions that the global liquidity environment would be supportive and foreign flows would continue.
• Earnings expected to continue to be in double digits. There is a simple formula for predicting earnings growth: we expect GDP to grow by 6 to 7% with inflation around 4% translating into a real GDP growth of 10 to 11%. To support this number corporate growth rate needs to be in mid-teens.
• India is a country that is high on savings. About 5% of these savings are invested in equities. The next economic growth is expected to be driven by investment cycle as households start deploying higher investments in equities. 
• Start of a private sector capex cycle could be a strong trigger for the corporate growth in 2024.
• India seems to be trading at a premium to other emerging economies. However, taking a closer look at the MSCI emerging markets index shows a different picture. China which has the highest exposure in the index, is devalued. Looking at ex China valuations, India does not seem that expensive. Moreover, with more than 450 Indian stocks in the investment radar for FIIs, Indian equity markets provide depth and breadth for foreign investors.
• There is a maturity in the behavior of investors in India, today. Indian investors now enter equity markets with an understanding that it is a risky asset class, and they need to stay invested for a longer term. Investors have also started following goal-based investing.
• Key themes to look out for:
  • o Private capex along with real estate boom could pave the way for real estate cycle to kick off creating investment opportunities in real estate and allied sectors like building materials, infrastructure, and manufacturing.
  • o Shift to technology, which is disrupting existing sectors, re-evaluation of existing older themes and shift to cleaner / greener technology could create investment opportunities in the future. 

Session 3 – Bond Markets – Road map for 2024 

Moderator - Shriram Mahadevan, Principal - Endowment Investment Group Azim Premji Foundation

Panelists - B. Prasanna, Group Head - Global Markets - Sales, Trading And Research

ICICI Bank Ltd. Madan Sabnavis, Chief Economist, Bank of Baroda,  Manish Wadhawan,  Head Global Treasury, Tata Consultancy Services Ltd. and Prashant Pimple, Chief Investment Officer - Fixed Income, Baroda BNP Paribas AMC

Key Highlights for Fixed income markets:

• 2024 is expected to see more policy volatility than 2023. Key will be to understand US FED’s viewpoint on rates.
• The most important thing will be the timing of US FED’s pivot and the quantum of rate cut. Expect US FED to pivot in June-2024. 
• Panel’s expects US FED’s and market expectations on rates to align in 2 years. 
• RBI rate cuts are expected to follow once the US FED starts cutting rates. 
• The panel discussion on US recession pointed more towards a soft-landing scenario in US, with US exceptionalism supporting the same. Tweaks in Fiscal policy spends, Energy security as US is the net exporter of oil. The same is expected to  cap the downside on the dollar index. Expect other advanced economies like UK, Eurozone to see larger impact than US. 
• On the global bond index inclusion, expect ~$ 30 bn of foreign flows in 2024. 
• Supply and demand of government borrowing still not a problem in 2024.
• The panel expects more favorable and stable outlook in currency and policy corridor. 
• On State finances, the story has been contrary to center’s fiscal policy. Higher state spending recently has led to higher state fiscal deficit thus the recent increase SDL yields.