He is known for his articles on capital markets, wealth management, and Indian and global economy. He has presented many papers and delivered many lectures on the capital market in national and international seminars. He has authored four books on economics, presented eight papers in international seminars and 65 papers in national seminars.
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The important questions are: How serious is the slowdown? When can we expect a recovery in the economy? How are markets positioned?
The slowdown is sharp
The slowdown is, indeed, very sharp. The FY2019 growth rate of 6.8 per cent was the slowest in five years and Q1 FY2020 growth rate of 5 per cent was a 25-quarter low. If the Q2 FY2020 growth rate also comes below 6 per cent, which is very likely, it would mark a serious deceleration. If that happens, it would be the first time in seven years that India would be seeing GDP growth below 6 per cent for two consecutive quarters.
But there will be a clear pickup in growth in Q3 and Q4, thanks to the base effect alone, if not anything else. And we are likely to end FY20 with a growth rate of around 6 per cent, which will be one of the good growth rates among large economies.
Global economy slowing
The global economy, which accelerated in 2017 and 2018, has been decelerating this year. According to the IMF, Calendar 2019 is likely to end with global output growing at around 3 per cent. Even though US growth and employment data have been impressive, the economy is decelerating after the longest expansion in history.
US growth is likely to dip below 2 per cent soon. The euro zone is clearly weakening and is likely to slip into recession if there is no Brexit deal. Germany, the powerhouse of the EU, is on the verge of a recession and two other large economies, Italy and France, are also not in a good shape. China’s growth rate has almost halved from the peak of 12 per cent and is likely to weaken further. Japan is
struggling. The US-China trade war has impacted global trade, which saw just 1 per cent growth in H1 of 2019.
Consequently, poor exports have impacted economic growth in most countries. In brief, the global economic scenario is far from favourable, and a global recession in 2020 cannot be ruled out.
Synchronized global monetary stimulus
The US Fed again cut interest rates on October 30, without signaling an accommodative policy. Earlier the ECB had announced QE 2.0. For the first time in 10 years, 20 central banks have cut rates this year, which is indicative of the serious slowdown in the global economy.
This monetary accommodation can succeed in pre-empting a global recession in 2020, but a lot depends on how the US-China trade war evolves.
According to the Fed, trade policy uncertainty accounted for a 0.8 per cent dip in global GDP in the first half of this year. Therefore, trade policy and global trade are crucial in deciding how the global economy responds.
India will rebound in H2
The government has responded, though a bit late, to the challenging economic environment in India with appropriate stimulus. The big bang corporate tax cut has come as the icing on the cake of several stimulus packages announced earlier. The monetary stimulus provided by RBI through five rounds of rate cuts totalling 135 bps will start yielding results soon. Since inflation is very low, there is room for further rate cuts by RBI. Monetary policy acts with a lag of two to three quarters in India, and therefore, the beneficial impact of the monetary easing can be felt in Q3 and Q4.
Furthermore, a bountiful monsoon this year will raise agriculture growth rate, mitigate rural distress to some extent and stimulate aggregate demand in the economy. Also, the positive impact of various stimulus measures announced by the government will be visible by the last two quarters of the financial year. The favorable base effect alone will raise growth rates in Q3 and Q4.
Bold reforms to trigger animal spirits
The policy environment in India is changing fast in favour of reforms. Bold reform, including privatisation, is the only way out of the quagmire of decelerating growth. The government has recognised this, though a bit late. With strategic sales of BPCL and other PSUs, privatisation will gather momentum. After the steep cut in corporate tax rate already announced, there is also talk of a cut in personal income-tax.
These reforms, already announced and imminent, have the potential to revive the animal spirits in the economy.
History will repeat itself
The stock market presents a classic example of history repeating itself. History of stock markets tells us that booms are followed by crashes, and crashes lead to smart rebounds, taking the market to levels higher than the previous highs. Let’s take a look at the booms, crashes and recoveries of the Indian stock market since the early 1990s.
It is evident from the table that booms have been followed by crashes and crashes have led to sharp recoveries, which took the market to higher levels. The current downtrend will be no different. But it is important to appreciate the fact that peaks and troughs of the market will be known only in retrospect.
Therefore, the only strategy, and the best one, for investors is to put money systematically, unmindful of the short-term ups and downs of the market. Investors should remember that stocks are available at attractive valuations during periods of pessimism.
Since we are in a pessimistic environment, there are very good shopping opportunities for the discerning investor.
Remember, fortune favours the brave!
1 Comment on this Story
Asm Jan324 days ago
Highly optimistic article!