The latest GREED & Fear report from CLSA’s Chris Woods is out. This week, Woods ceases to focus on China and gets into a discussion of the problems facing the neighboring country of India. Some excerpts from the latest report are below.
If India is no longer a hot story, that is as a result of the sharp deceleration of growth which has occurred as a consequence of the end of the investment cycle. Thus, India’s real GDP growth has slowed from 11.2%YoY in 1Q10 to 5.5%YoY in 2Q12. While gross fixed capital formation as a percentage of nominal GDP has fallen from an annualized 33.3% in 3Q08 to 29.2% in 2Q12.
If the Congress Party appears to have woken up to the risk of a potential looming fiscal crisis, another wake-up call has been that its likely candidate in the next general election, Sonia Gandhi’s son Rahul, could face a potentially formidable opponent in the form of BJP Gujarat Chief Minister Narendra Modi. GREED & fear discussed the economic success story of Gujarat five months ago.
And………..the view GREED & fear has picked up this week is that finance minister Chidambaram has succeeded in convincing Mrs. Gandhi that reforms are necessary, if India is to avoid a further growth slump and related fiscal deterioration.This would in turn threaten Congress’ existing entitlement programs, as well as the government’s ability to introduce Mrs Gandhi’s long desired food security bill, the aim of which is seemingly to guarantee the supply of food to the poorest. This is in the context of the significant deterioration in India’s fiscal position in the last two years, combined with the vulnerability of the currency posed by the country’s still large current account deficit. Thus, the central government deficit rose from 4.9% of GDP in FY11 to 5.8% in FY12, and is forecast by CLSA’s economics team to reach 6% of GDP this fiscal year. Including the states, the total fiscal deficit is forecast to reach 8.7% of GDP.
A national election contest between Modi and Rahul Gandhi will give the Indian electorate a real choice and would generate a lot of attention globally, as well as nationally. For the business community and domestic investors, there is no doubt that a Modi victory would be widely welcomed, given his track record in Gujarat, and given the fact that most of the economic reforms of the past 15 years took place at the national level under the previous BJP government of Atal Bihari Vajpayee between 1998-2004. That is at least, until the recent flurry of announcements by Chidambaram. If this is the case, it should also be noted that the undoubtedly charismatic Modi is viewed with suspicion by the liberal intelligentsia as an autocrat, with the weird habit of referring to himself in the third person when speaking!
The above is why the focus by the Congress-led Government is now on trying to generate some momentum in its final 12 to 18 months in power. At the very least, this requires trying to stabilize the fiscal situation to allow for more vote-gathering populist entitlement schemes, such as Mrs Gandhi’s beloved food security bill. Still, for the growth to resume at the 8% plus level will require resumption of the investment cycle, and this will require a pickup in corporate confidence, given that the slowdown in gross fixed capital formation in the past four years is almost entirely accounted for by the slowdown in private sector capex. Thus, the share of private corporate capex in gross fixed capital formation has fallen from 43% in FY08 to 33% in FY11 .