Moitrayee Sinha & Sharmistha Roy: Global rating giant Moody’s Investors Service revised India’s GDP growth forecast downwards for the current year to 6.2 percent late last week due to continued sluggishness in overall economic conditions due to a combination of multiple factors including weak hiring, tough situation in rural households and tighter financial and investment environment. The previous estimate was 6.8 per cent. And the same for 2020 was also lowered by a similar 0.6 percentage points to 6.7 per cent.
We believe that there is an excessive pessimism driven by weak global sentiment overcasting economic sentiments in India. If we note carefully, there have been few major policy announcements from our Hon. Finance Minister and The RBI Governor in separate occasions which have far reaching impact to boost the economy in the longer run. Apart from the macro policy interventions from the RBI and the Government, there are couple of key support factors being ignored by the media in general under the gloomy global economic backdrop.
We have been seeing a bountiful monsoon in this year both in terms of quantity and coverage. Though we only have 18% of our GDP contributed by agricultural sector but it has the capability of creating domino effect in terms of aggregate demand creation contributed by rural economy where 60% of our population live and dependent on agricultural and allied activities. A good monsoon can ensure good harvest and which in turn will generate strong demand in two-wheeler, tractors, passenger vehicle sales, consumer finance, consumer durable and FMCG sectors during the festive seasons and last two quarters of this fiscal year.
Another interesting thing is the softening global crude oil prices and lower level of inflation. These are the two major elements causing Rupee to strengthen or at least hold its position even under strong headwinds. Every rupee drop in our exchange rate impact our import bill (majorly from crude oil import) by one billion dollar. Hence the strengthening of Rupee will ensure that more money is available to be spent on infrastructure development and hence job creation.
While the government has taken decisions of removing additional surcharge on foreign and domestic investors, reducing GST on automobiles will certainly boost the overall sentiment of the government, the most critical one is regarding priming up banking sector by infusing 70 thousand crore to revive growth. Assuming a 7:1 debt equity ratio, this will create an additional 5 lakh crore lending for the economy in months to come. This additional credit availability will soften the interest, boost the growth, economic activities and hence job creation.
Given the above backdrop, we quite confident that Indian economy will bounce back with an expected GDP growth of 6.9 % – 7.1% range within the next 12 months. Hence this is the right time for long term value investors to invest in quality equity stocks for long term (horizon greater than 18-24 months) value creation.