GROWTH – COLLATERAL DAMAGE IN ELECTION YEAR

The timing is simply impeccable. Just a day after India celebrated its 71st Independence Day, India Rating (Ind-Ra), the 100% subsidiary of Fitch Group lowered the growth projection for the current fiscal (2018-19) to 7.2%. This is a cut of 20 bps from its earlier estimate of 7.4% GDP. And IMF, which famously said last week that Indian economy is an elephant that is starting to run; it too cut its projection by 10 bps from 7.4% to 7.3%. And RBI, even in its recently announced credit at the beginning of the month, maintained GDP for FY19 at 7.4%.

What is extremely interesting is the logic which Ind-ra gave yesterday for the lowering of projection. It rightly accounted for what we all know – populism before elections will affect growth. It did cite other reasons too – the usual suspects – high crude oil prices, Government’s decision to fix the minimum support price of all kharif crops at 1.5 times of the production cost, rising trade protectionism, depreciating rupee and no visible signs of the abatement of the non-performing assets of the banking sector.

The only good news – though it expects a marginal rise in inflation, it does not see any further rate hike during the current fiscal.

On the other hand it does expect the elections to leave a dent on the state finances. With elections coming soon, popular gimmicks to win votes like loan waiver, subsidy and spending on welfare schemes will take a toll on the finance of states.

What Ind-ra has done is put in a report and through statistics shown us what happens when India goes to vote. The year prior to the election, not just in India, pretty much all around the world, everything comes to a standstill and it’s a wait-and-watch mode all around – right from the stock market to realty.

The stock market might be exhibiting wild swings but this underlying volatility is likely to the hallmark of our trading till elections get over.

Yes, as the world’s largest democracy gets ready for the new year ahead, FY19 will essentially be all about a wait and watch; all moves by the Govt will be more of an election campaign.

What this means is that from now till next year, the country – its people, its economy, its social progress; basically everything will be on move at break neck speed for initial six months and then all decisions will be on hold.

This is also true for our stock markets. We will have the monthly IIP, inflation and intermittent RBI policies to look forward to.  Yes, be sure, it will all be with an eye on 2019 – all hunky dory and optimistically positive. But keep an eye on oil and inflation; irrespective of what RBI says, cyclically and even seasonally, the writing on the wall says that the dynamics could be headed for a change.

We as retail investors have anyway turned into mute spectators, watching the index move like a yo-yo which has moves to the tunes of FIIs, domestic funds and HNIs. The bigwig stocks as such are quoted at PE multiples of 100 and over.  Thus there are some stocks which are grossly overvalued, running much ahead of their fundamentals but at the same time there do remain many small and midcap stocks which continue to look good.

Thus lowering of growth estimate for current fiscal should not dampen the mood as that is bound to happen for any country that is going to vote soon.

This week, we have bid adieu to two stalwarts of Indian politics, Karunanidhi and Vajpayee. As we get into the weekend, we can only pray that more “soulful” poets with great leadership abilities, steers India into a new world. That’s hoping for too much; that too, over a weekend!