Given the structural fault lines in the edifice of the Western economies
(particularly the US economy), we expect FY13 to be characterized by
continued macroeconomic uncertainty. History points to the detrimental
impact that uncertainty has on India's investment demand growth, which in
turn will spell continued weakness for the industrial sector growth. However,
the expected fiscal largesse of the Central Government ahead of the general
elections (scheduled for CY14) is likely to counter the downward pressure
imposed by weaker Industrial sector growth on Services sector growth.
Heightened economic uncertainty to mean sustained weakness in
investment demand
As highlighted in our note dated August 16, 2011, India's economic growth process
remains critically coupled with the pace of economic activity in the West, especially the
US economy. Low growth in the US economy and the resultant rise in risk aversion has
historically proved to be detrimental to India's capex cycle (see exhibit 1 and pg 3 of
this note for details). This dynamic is responsible for the historical phenomenon
whereby investment demand in India experiences sharp v-shaped dips in years that are
characterized by macroeconomic crises (see exhibit 2 for details).
Weakness in the US economy is likely to persist in FY13 (with the US Fed implicitly
admitting to the same by announcing 'operation twist' last night) as the US economy
undergoes a multi-year slowdown (refer to pg 3 and 4 of this note for details) and
global macroeconomic uncertainty persists . This in turn is likely to mean continued
weakness in India's capex cycle (which depends meaningfully on equity capital
inflows).
GDP growth to remain moderate at 7.2% YoY in FY12
We expect moderation in economic activity to persist in FY13 and expect GDP to grow
at 7.2% YoY (see exhibit 4 below for composition details, exhibit 5 below for
assumptions and pg 7 of this note for GDP growth model details).
Exhibit 4: Moderation in economic growth to persist in FY13
Growth (YoY) GDP Agriculture Industry Services Investment
demand
FY11 8.5% 6.6% 7.9% 9.4% 8.6%
FY12(E) 7.1% 2.1% 6.7% 8.6% 5.5%
FY13 (E) 7.2% 4.5% 6.3% 8.2% 4.5%
Source: CEIC, Ambit Capital research
Weakness in investment demand growth is likely to mean that industrial sector growth
will continue to remain subdued in FY13. Whilst weaker industrial sector growth will
prove to be a headwind for Services sector growth, Government revenue expenditure
is likely to support the Community, Social and Personal Services (CSPS) component of
'Services', which is likely to experience high growth ahead of the scheduled general
elections in CY14. Finally, the low base is likely to buoy up farm sector growth in FY13
assuming normal monsoons.
--Regards,
Prasanth KS
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