The structural fault lines in the edifice of the Western economies (particularly the US economy), we expect FY13 to be characterized by continued macroeconomic uncertainty. History points to the detrimental impact that uncertainty has on India's investment demand growth, which in turn will spell continued weakness for the industrial sector growth. However, the expected fiscal largesse of the Central Government ahead of the general elections (scheduled for CY14) is likely to counter the downward pressure imposed by weaker Industrial sector growth on Services sector growth. Heightened economic uncertainty to mean sustained weakness in
investment demand
As highlighted in our note dated August 16, 2011, India's economic growth process remains critically coupled with the pace of economic activity in the West, especially the US economy. Low growth in the US economy and the resultant rise in risk aversion has historically proved to be detrimental to India's capex cycle (see exhibit 1 and pg 3 of this note for details). This dynamic is responsible for the historical phenomenon whereby investment demand in India experiences sharp v-shaped dips in years that are characterized by macroeconomic crises (see exhibit 2 for details).
Weakness in the US economy is likely to persist in FY13 (with the US Fed implicitly admitting to the same by announcing 'operation twist' last night) as the US economy undergoes a multi-year slowdown (refer to pg 3 and 4 of this note for details) and global macroeconomic uncertainty persists . This in turn is likely to mean continued weakness in India's capex cycle (which depends meaningfully on equity capital inflows).
GDP growth to remain moderate at 7.2% YoY in FY12
We expect moderation in economic activity to persist in FY13 and expect GDP to grow at 7.2% YoY (see exhibit 4 below for composition details, exhibit 5 below for
assumptions and pg 7 of this note for GDP growth model details).
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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