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Credit Suisse Securities (India) Managing Director Neelkanth Mishra has forecast a gloomy picture for the country’s economy over the next 12 months and the overall market sentiment. “This will be a year of uncertainty. We think there will be 12 to 15 months of disruption,” he told the media, based on their latest research paper.
Mishra said there would be significant uncertainty on the global front and within the local economy… there is also too much volatility around the demonetisation exercise. Consumption spend in India has slowed post demonetisation and monthly automobile sales (in December) declined by 18.66 percent, a 16-year-low.
Last week, India’s advance estimates from the government of India revealed that the country's GDP growth during 2016-17 is likely to grow at 7.1 percent, compared to 7.6 percent for 2015-16. According to the government's latest growth estimates, the pace of growth will be impacted by slowing growth in the manufacturing and mining sectors and also construction activity.
Mishra does not expect too much investment taking place at this stage. “If I were a businessman, I would rather wait for the Goods and Services Tax (GST) regime to start, for the impact of demonetisation to play out and [at the global level], see what the policies of the US president elect are,” he said.
Two of the key growth engines of India’s economy, the real estate and the banking sectors, continue to witness pain within the system, triggering fears of a further slowdown.
Mishra expects the correction in the real estate sector to slow the economy down further. “Transaction volumes are likely to stay muted as we see a buyers’ strike while the sellers try to hold onto prices, construction activity is likely to slow down. Real estate contributes 13 percent to the country’s GDP. A decline in real estate prices can also have a negative impact on discretionary consumption, as nearly 95 percent of household wealth is in land and real estate.
The banking sector also continues to be under stress from the high percentage of bad loans in previous years. Most public sector banks have been under greater pressure and have made higher provisions to deal with this problem. Mishra is not too optimistic about the revival in fortunes for public sector banks.
“The government has been signalling in many ways that it will not allow them to grow and allow the private sector banks to gain market share. “This does not mean that the banks will be allowed to fail. It is much easier to allow them to drift. Even in the recapitalisation programme [Rs 70,000 crore infusion till year 2019], they are assuming that they will not grow faster than the rest of the sector,” Mishra told reporters.
Despite all the negative factors, Mishra said disruptive factors and most of the changes introduced by the government through demonetisation and the introduction of GST, will emerge as positives for the economy over the medium term (next 18-24 months). “Cheaper real estate can bring down the clearing price and trigger more construction; GST and demonetisation can help India break out of the two vicious cycles that it is stuck in and move it to a higher equilibrium.”
From a stock market perspective, Credit Suisse continues to remain optimistic despite their concerns over the banking system. “One of the important trends over the past five years has been the steady outperformance of the broader indices over the narrower indices. This was mainly because the narrower indices have more global exposure, and the "Next400" -- the stocks that are in the BSE500 but not in the BSE100 -- and were driving the outperformance of the BSE500, are mostly about India-focussed stories,” said Mishra.
“In our view, this trend is likely to reverse over the next 12 months. Despite the pick-up in the last month, there has been under-performance of the “Next400” over the past three months,” Mishra added.