Q1FY14 GDP slumps to 4.4%. Slowdown gripping!!
Aug 31, 2013

Author: PersonalFN Content & Research Team

The slowdown in the Indian economy is getting evident and gripping. The Gross Domestic Product (GDP) at factor cost with 2004-2005 constant prices for the first quarter of fiscal year 2013-14 (Q1FY14) slumped further down to 4.4% from 4.8% in Q4FY13. It is noteworthy that in the first quarter of the last fiscal year, the country had clocked a GDP growth of 5.4%, and thus now such a continual slump is a cause of concern as there seems to be a loss in momentum. This is the slowest rate for the economy since the global financial crisis began. While Industrial growth remained anemic and agricultural growth flat; relatively good performance of services saved economy from recording even lower growth rate.

Mining and quarrying coupled with manufacturing registered a negative growth. While mining decelerated by -2.8%, rate of growth in manufacturing was -1.2% in the first quarter. Besides these two sectors, construction, electricity, gas and water supply grew at a subdued pace as compared to that in Q1 of last fiscal. Activities in trade, hotels transport and communication also slowed considerably. Sectors that recorded high growth numbers were financing, insurance, real estate and business services and community, social and personal services.

(Source: CSO, PersonalFN Research)

The poor performance of economy can be attributed to:

Agriculture, forestry & fishing: Despite after considering seasonality, the sector registered a stagnated growth of 2.7% in Q1, FY14 as against 2.9% registered in Q1, FY13. The sub-3% growth has shown its impact on GDP growth due its considerably hgih weightage in GDP. The impact of good monsoon has not been captured in agricultural growth.
Manufacturing: High interest rates, moderation of growth in the broader economy and lower demand impacted manufacturing growth. Gross capital formation has yet again recorded a negative growth (down 1.1%) suggesting slack in the investment cycle. Poor performance of manufacturing has been dragging the industrial growth and in turn overall economic growth as well.
Trade, hotels, transport and communication: Despite the fall in rupee, the sector has recorded a sharp decline in growth as compared to that recorded in the same period of the last fiscal. High retail inflation led by high food prices seems to have affected the performance of the sector. Private final consumption grew at just 1.6% as compared to 4.3% registered in Q1, Fy13. Higher interest rates are also responsible for slowing consumption.

PersonalFN is of the view that, the performance of the economy may have been even worse had not community, social and personal services sector performed well. The performance of this sector was mainly a result of increased government expenditure. This has negatively affected the fiscal position of the government as the fiscal deficit (which is to be reined in at 4.8% in FY 2013-14) has come in at massive 10.5% in April-June quarter. Unless rupee stabilises, it is unlikely to see interest rates going down, as RBI has clarified that it may keep short term interest rates high until rupee remains weak. However, this may further affect the growth of industry.

Prime Minister's Economic Advisory Council remains hopeful that in coming quarters, positive impact of good monsoon would be reflected in agricultural growth. Lower food price inflation may then boost personal expenditure.

What should equity investors do?

The descending move of the Indian equity markets has made valuations appear relatively attractive. But in the aforesaid backdrop, the risk remains and therefore volatility would persist. Thus PersonalFN is of the view that investors should stagger their investments to mitigate risk, since volatility could persist. While investing in equity mutual funds, PersonalFN recommends one to opt for the SIP (Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However, while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years. Also PersonalFN believes that your investment discipline and asset allocation would decide your success in investing.

What should debt investors do?

PersonalFN is of the view that, unless rupee stabilises and recovers, RBI may not be able to soften its stance on short-term rates. This may also keep liquidity situation tight even in future. India has a problem of financing nearly U.S. $70 billion worth Current Account Deficit (CAD). This is a huge challenge. Weaker rupee may continue to put pressure on CAD and therefore even bond yields - where the impact would be felt more at the longer end of the yield curve. Recently yield on 10-year benchmark G-Sec bond had moved close to 9.50% although it came off sharply, highlighted volatility. Betting on longer end of the yield curve may be risky even if you have a longer time horizon.

PersonalFN believes investors should not hold more than 20% of their debt portfolio in long-term income / debt funds. Fixed Maturity Plans (FMPs) look attractive under current market conditions. While investing in FMPs you should opt for funds with shorter maturities. FMPs would not only enable you to benefit from higher yields but would also help you generate higher post-tax returns, especially if you fall in the maximum tax bracket. Capital gain tax on FMPs is 10% without indexation or 20% with indexation if maturity is above 365 days.

What should investors in gold do?

After dipping almost for last 2 months, gold prices have again started moving upward. The overall trend for gold, we believe seems to be intact with the global economy surrounded with downbeat economic situation and the risk event phase. The easy monetary policy adopted by the developed economies in order to aid growth, will be supportive for gold. Also the festive and wedding season in the ensuing month(s) will facilitate gold to look bold. Also traditionally, the demand for gold in India (world's top consumer of gold) rises in the last quarter of the calendar year, and this cyclicality could push gold prices further northwards.

However, for investing in gold we recommend that you opt for the smart way of investing i.e. Gold ETFs for the host of advantages it offers over holding gold in a physical form. At PersonalFN, we recommend that you should have a minimum of 10% -20% allocation towards gold and invest in it with a long term perspective with a time horizon of 10 to 20 years.