Deep structural reforms only way to reverse economic slowdown
The government has limited scope to do stimulus given the fiscal constraints.
The net profit growth for FY20, which started with high teens and above is now been downgraded to low teens or lower. Further downgrades to earnings seem to be a possibility due to domestic consumption and investment sectors, including autos, capital goods, construction material and consumer durables, which depict continued subdued demand conditions as well as global economic slowdown putting pressure on global commodity and IT sectors.
It is evident that deep structural reforms may be the only option to reverse the current economic slowdown and increase India’s investment and GDP growth rates. The government has limited scope to do stimulus given the fiscal constraints. The Budget has also raised taxes across the board, which will curtail consumption. The RBI may cut policy rates by another 15 to 40 bps, but may not be sufficient to revive economic growth, since bank lending and borrowing rates have not fallen much due to various reasons. Households too have slowed down on their consumption due to their discomfort with regards to general economic conditions whereas a dip in household savings rate has also been observed.
India’s broad market valuations may look reasonable compared with historical average with the recent correction in the market. However, overall valuations offer little in terms of investment inputs currently, even less than usual given large price value distortions across the market.
The current market makes investing more difficult due to the large variations where we find a section of the market super expensive and the other section super cheap, the continuation of price value distortions across entire market valuation spectrum for long periods of time thanks to central banks pumping money thus diluting the concept of risk as also uncertain global and domestic macroeconomic conditions.
Bond yields no longer represent correct level of risks to companies cash flows since loose monetary policies of global central banks have suppressed the yields, where low risk free rates may not necessarily mean low cost of equity. The only hope seems to be that global liquidity (with quite a lot of government debt yielding negative returns) chases markets such as India where there is still growth available relative to the world.