India: Fragile...

The Indian Space research organization terminated its Chandrayaan mission yesterday after losing contact with the unmanned vehicle, a setback for the agency which had hoped would get more than double the orbit time from the craft. The Indian space program is symbolic of the nation’s aspirations and, although the mission was not a failure having logged almost 315 days, it was a disappointment to the public.

 

Here on earth, GDP data released yesterday showed that the Indian economy experienced renewed vigor in the second quarter, expanding by 6.13% year-over-year; the first sequential increase since 2007.

 

The stimulus programs enacted earlier this year have had a pronounced impact, with increased government expenditures as a major driver (see chart below). Like the Chandrayaan, this figure was both a success and a disappointment for the administration. It came in lower than consensus had anticipated and as reports surface that the official five year economic growth estimates will be lowered to 7.8% (from 9%), the reality of stagnation in some core industries is sinking in.

 

India: Fragile...  - india 1

 

The glass half full case here is fairly straightforward: Although central government debt has risen significantly to finance stimulus programs, overall debt levels remain at a manageable level of GDP and are primarily domestically funded (see chart below).  Additionally, the still low rate environment and negative wholesale inflation levels have created a degree of demand resilience in pockets of the consumer and light industrial sectors.

 

India: Fragile...  - india2

 

The glass half empty case is equally easy to digest: Although official trade data for July will be released tomorrow, recent corporate filing data suggests that much of the emerging demand from neighboring China has passed India by (external trade currently accounts for less than a third of GDP by most estimates).  With drought conditions declared in 278 districts, the disappointing monsoon rains have left bleak prospects for the harvest that half the nation’s population depends on for their meager livelihood. Although wholesale inflation remains negative, CPI measures have remained worryingly high and Ministry of Finance officials have openly discussed fears of inflationary pressure later in the year.

 

I have held a negative bias against the Indian Equity market since we started early last year due to overlapping macroeconomic, tactical and fundamental factors and I have not always been right (recall that we were gored by India bulls in the aftermath of the NCP’s national election victory). Although this latest data is definitely encouraging, I still find myself grappling with fundamental doubts that the economy’s trajectory will be sustainable without a more rapidly developing mass-consumer class or more competitive export industries.

 

We currently have no position in India, long or short.

 

Andrew Barber
Director w Barber
Director


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