The latest updates on the gross domestic product (GDP) situation are positive. Growth may stabilise above eight per cent in 2010-11 and accelerate again in 2011-12. This is despite genuine worries on the external front.
Another global crisis may act as a brake, but there are important considerations in favour of continuing stronger growth. One is that India did better than most through the last recession.
The second is policymakers now have history to draw upon to help sustain economic activity through another global dip. One major driver is rural consumption and investment. A key underlying variable has been increased connectivity. The highway-building programme is way behind schedule, but it has already improved rural access.
The second key is telecom connectivity. Network rollouts have erased rural-urban communication divides, though rural telecom penetration remains much lower. Anecdotally, rural families have quicker access to earnings of family members in cities through informal methods using mobile phones.
For example, X living in city can transfer money to his fellow urban-dweller Y, who tells his family to give credit to X’s family in the village. This is much quicker than money order remittance. Rural consumption is, therefore, less dependent on agricultural vagaries. In any event, monsoon forecasts are favourable, so agriculture won’t perform badly. So, growth will be good; it’ll be driven by higher consumption, and more specifically, higher rural consumption.
That usually translates into stronger growth in the fast moving consumer goods segment, better low-end and mid-end consumer durable growth and a pick-up in auto sales. Due to emphasis on affordable housing, it might also translate into stronger housing starts and bigger housing finance volumes. We’ve seen the relevant sectors display strong sales and profitability in the second half of 2009-10.
At the same time, equity valuations through the next 12 months could be muted, or even fall due to the global situation. Indian share prices are highly correlated to FII inflows. Since every financial crisis results in FIIs running away to hard-currency assets, the impact over the next few months may be negative. FIIs have been consistent sellers of Indian equity since the Greek crisis broke.
Judging by the past two months, domestic institutional buying is unlikely to fully compensate. One can’t conceive of a more favourable situation for a long-term investor than a combination of rising earnings and lower share prices. You have an entire set of industries slated to do well and you could get attractive valuations on them. What you will not get, however, is fast returns. The problem is that most Indian investors are actually traders with a short-term perspective. The ones who can adjust mindsets to cater to this situation are looking at excellent long-term gains.
The author is a technical and equity analyst