Credit Suisse forecasts dark days for Indian economy

In another damning indictment of Modi government’s economic policy, international ratings agency Credit Suisse on Wednesday said structural reforms including the GST had introduced significant uncertainties related to growth, fiscal health, inflation, currency and the banking system in the country, for the near term.

Credit Suisse' India Equity Strategist Neelkanth Mishra told reporters here that the "Indian economy is going through a period of dense fog" with uncertainty of macro-economic variables by itself is likely to impede investment intentions and act as a drag on growth, causing downgrades to the GDP as well as earnings estimates for the next financial year".

Various government and international reports have been blaming the GST and demonetisation exercise last year for sluggish economic growth since November last year. The Central Statistic Office (CSO) had earlier his month noted that India’s GDP growth for April-June quarter, pegged at 5.7 per cent,

Terming the Indian economy as "a house under renovation", Mishra said, "a number of structural changes like the exodus of millions of workers away from agriculture, the introduction of GST, the Real Estate (Regulation and Development) Act and the Bankruptcy Code are breaking down vicious cycles that the economy was trapped in".

"However, they also introduce significant uncertainty on several macro-economic variables in the near term: growth, fiscal health, inflation, currency and the banking system," Mishra added.

According to findings by the financial service major, government spending growth is slowing down sharply, while half of the population is seeing weak income growth.

"Despite good monsoon resulting in agriculture volume growth pickup in 2016-17, low food prices moderated overall gross value of output," Mishra said.

Further, he also said that various indicators like oil demand is still weak although it is showing a pick up.

"Oil demand growth which turned negative in February 2017, is picking up now but is still weak, also cement demand weakened sharply post demonetisation has turned positive in May this year, but still needs to show signs of recovery," Mishra said adding that there is uncertainty if such weak indicators "are temporary".

However, Mishra observed that a weak economy would not necessarily result in markets also doing badly and said that a sharp correction in the markets at this time would only be because of global factors.

Noting that markets and the local economy are not always in sync, Mishra said that 25 per cent of the BSE500 market capitalisation is almost completely driven by global factors, 22 per cent by local macro-economic situation, 42 per cent from penetration-driven stories and 11 per cent by market share (private sector banks and telecom).

"The markets and the economy are weakly linked, and there are pockets of growth even in this otherwise weak economy, such as high-end discretionary consumption, and beneficiaries of higher financial savings," he added.

On RBI interest rate cuts, Mishra said that "the economy is "in a period of uncertainty and rate cuts may not happen in next 3-4 months, we will get meaningful rate cuts in next 9-12 months".

A separate research report by the State Bank of India on Thursday forecasted that India’s GDP would remain below 6 per cent in the second quarter of 2017-18 owing to muted agriculture growth and sluggish performance of manufacturing and mining sector.

The GDP stood at a three year low at 5.7 per cent for April-June quarter of 2017-18, which the report said has raised concerns about the annual GDP numbers for the fiscal.

(with PTI inputs)