While capital markets are eagerly waiting for the budget hoping it to spur reforms; broader macroeconomic indicators suggest a more quiet recovery. Recently disclosed GDP data was confusing rather than appeasing. GDP calculated using new method shot up to 7.5% in the 3rd quarter of Financial Year (FY) 2014-15. Since such a sharp spike wasn't backed by other indicators; it gave rise to many questions. Other indicators such as inflation indices, factory output data, import-export numbers, credit growth indicators and corporate results point at weaknesses of the economy. Let's have a look at each of them one by one.

Sluggish growth in manufacturing: Index of Industrial Production (IIP) grew at 1.7% in December 2014. Barring exception of May; IIP growth has stayed below 5% throughout the year 2014. Ordinary growth in manufacturing and poor performance of mining sectors dragged the performance. Manufacturing index which is the main constituent of IIP Index grew at just 2.1% in December 2014; whereas mining activities shrank by -3.2%. Unless IIP growth revives and sustains at higher level; recovery in GDP growth would remain less convincing.

Weakening macros…
Data as on February 12, 2015
(Source: CSO, PersonalFN Research)

Retail inflation inches up again: After recording the lowest ever reading of 4.38% in November 2014; retail inflation rose for the second consecutive month in January 2015. Retail inflation measured by the movement of Consumer Price Index (CPI) came in at 5.11% in January 2015. The overall retail inflation might look under control but considering the 6.13% increase in food and beverages category; retail inflation doesn't appear to have come down decisively. Milk and milk products, Fruits and Vegetables, pulses and products witnessed a sharp jump ranging 9%-10% in January 2015. This suggests that life essential products are still recording steep price escalations. Meanwhile, Wholesale Price Index (WPI) which mainly captures industrial inflation fell in the negative territory in January. At -0.39% WPI reflects positive impact of falling commodity prices at the international markets and the relatively stable Indian Rupee; but also points at poor industrial activity.

Agricultural output is expected to be lower: As estimated by the Department of Agriculture and Cooperation (DAC) production of food grains is expected to decline by 2.9% in 2014-15 as against the rise of 3.0% registered in 2013-14. Risk of high inflation may arise again, if the situation of fall in output of food grains is not handled properly. Moreover, production of pulses and oilseeds is also expected to fall by 3.4% and 9.6% respectively against the respective increase of 5% and 6.3% recorded in previous year. Lower agricultural output may pose a threat to already high food price inflation.

Falling exports: Although, lower oil prices are helping Indian economy lower trade deficit; fall in exports is a matter of concern. Exports which account for almost 20% of India's GDP fell by about 11.2% in January on Year-on-Year basis. Trade deficit at USD 8.32 billion however fell to an 11-month low. Falling exports on account of weak global demand, may pose a serious threat to ‘Make in India' programme of India which intends to boost Indian exports. Indian companies are affected when there is a lack of demand for India's exports from Europe and China.

Falling bank credit growth and deteriorating asset quality: As per the RBI records, credit growth in first 9 months of the Financial Year (FY) 2014-15 reached its slowest pace since 1998. Until a few quarters ago, it was believed that, as the economy would recover, problem of Non-Performing Assets (NPAs) may become less serious. But latest quarterly results suggest that the worst may not be over just yet. Banks are finding it difficult even to recover restructured loans and many of the restructured loans have started turning bad. In order to give a fair chance to borrowers, banks sometimes allow restructuring of loans. However, what is terrifying is despite of renegotiated terms, restructuring of loans is not working for banks. As far as recovery of economy is concerned, picture remains obscure. Priority and infra sectors are the biggest sources of stressed assets. Developments such as cancellation of licences of captive coal mines and non-availability of gas and coal for power plants pose an even bigger threat to already stressed banking sector as borrowers are feeling the heat.

Profit growth of companies remains lacklustre: As reported by Business Standard dated February 16, 2015; Indian companies have recorded their worst performance in last 5 quarter during October-December (Q3, 2014-15). In the quarter gone by average profit growth of 2941 companies declined nearly 17%. Moreover, growth in their sales during Q3, 2014-15 was the worst in last 3 years.

PersonalFN is of the view that, pre-budget rally may end in disappointment if the upcoming budget fails in fulfil market expectations. Market valuation has become poor especially after considering sluggish performance of corporates. Unless broader economic indicators improve it would be difficult for the markets to sustain at current levels. PersonalFN believes, you shouldn't speculate on any of the macro-economic development and invest in any asset class. On the contrary you should take a holistic view of your financial goals and invest as per your personalised asset allocation. Periodic review of your portfolio is important too.

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