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The past year has been torrid for Indian investors, whether they parked their money in debt or equities. So does the Economic Survey for 2015-16 offer some hope? Read on.
On the economy
Survey says : India is still oozing potential and its long-run potential GDP growth rate is at 8 to 10 per cent. But given the global sluggishness, GDP may be in 7-7.75 per cent range in 2016-17 in real terms. Nominal growth is a worry too. In 2015-16, it came in below budget estimates at just 8.6 per cent.
What it means: You can cheer the fact that the current slowdown may be temporary and India hasn’t slumped for good into the Hindu rate of growth.
But low nominal growth caused by low inflation is bad news. As long as nominal growth remains abysmal, you need to temper your expectation of corporate sales and profits growing in the double digits.
Survey says: India’s growth is intertwined with global growth and this correlation is rising. In 1991-2002 the correlation was 0.2. Since then, correlation has doubled. World economic growth has slowed to 3 per cent from the 4-4.5 per cent seen in 2003-2011.
What it means: India may be an island of better growth among world economies. But if the IMF continues to revise global forecasts downward and economies such as the US, Euro Zone and Japan struggle, you can expect this to dampen India’s growth to 7-ish per cent this year.
Survey says: The Seventh Pay Commission will improve urban spending and if the 2016 monsoon turns out to be normal, agricultural incomes will improve. Nearly 42 per cent of Indian households derive their income from farming.
What it means: Consumption is in good shape and the Seventh Pay Commission will continue to drive it. Urban consumption plays may stay in the limelight.
Survey says: El Nino conditions may abate by May 2016. Of the 21 prior El Nino events, 9 have been followed by a La Nina. La Nina episodes in India have usually resulted in bumper harvests for farmers. India’s agriculture growth has averaged 8.4 per cent in La Nina years, compared to the normal pace of 3 per cent.
What it means: Let’s pray for a La Nina in 2016 which can boost agricultural output, lift farm incomes (after two bad monsoons) and prop up agricultural GDP.
On savings and interest rates
Survey says: Inflation can moderate this year if a good monsoon tempers agri prices and Government is disciplined on MSPs. Global deflationary pressures remain live.
Therefore, CPI inflation will ease to 4.5–5 per cent in 2016-17. The RBI should be able to meet its inflation target of 5 per cent by March 2017.
What it means: If you’re an equity investor, lower inflation may boost consumption and lower rates help corporates save on cut interest costs. If you’re a debt investor, expect your returns to dip further. Lock into higher rates while the going is good.
Survey says: Gross domestic savings have stayed at 33 per cent of GDP in 2014-15, same as last year. Household savings fell from 20.9 per cent to 19.1 per cent in 2014-15. But much of the fall happened in physical assets (from 13.3 per cent to 11.4 per cent), while financial savings held ground (7.7 per cent). The corporate sector’s savings rose from 10.8 to 12.7 per cent of GDP.
What it means: Indian savers haven’t been able to save a lot from falling inflation. But at least they’ve stopped pouring all fresh money into gold and property. The corporate sector is hoarding cash. That creates room for higher dividends and buybacks for equity investors.
Survey says: India has too few individual tax payers at 4 per cent of population as against the desirable number of 23 per cent. Building fiscal capacity is vital. Tax thresholds in India have been raised far more rapidly than underlying income growth. Refrain from raising threshold limits on personal tax, so that rising income would automatically expand the tax base. Property taxation needs to be developed. Usher in an EET regime on savings instruments like small savings as these tax breaks go mainly to the rich.
What it means: Don’t be too hopeful of an increase in the basic exemption limits or income tax slabs in the Budget. If you were hoping for the NPS to get tax breaks at withdrawal, you may have to worry, instead, about other vehicles like the PPF getting taxed at withdrawal. The Government needs the money. Expect the taxman to take a closer look both at property assets and property transactions.
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