India’s second quarter 2012-13 GDP growth of 5.3% against a growth rate of 5.5% see in the first quarter is expected to take the full year GDP growth to its lowest levels seen since 2002-03 when the economy grew by just 3.8%. India’s growth for full year 2012-13 is expected at around 5.8% by the RBI and for that growth to be achieved the next two quarters growth should average 6.2%.
The higher growth (even if not averaging 6.2%) rate expected for the second half of 2012-13 is prompting many to believe that the GDP growth of 5.3% for the second quarter of 2012-13 will be the floor and that growth can only pick up from these levels. Economic data does not fully support the bottoming of growth theory with mixed signals all round.
The IIP (Index of Industrial Production) growth for October 2012 came in at 8.2%, up from -0.4% growth seen in September 2012. The spurt in IIP growth is attributed to inventory pile up for Diwali sales in November and to a base effect, as previous year’s growth was negative 5%. The trend for April-October 2012 of 1.2% growth is below previous year’s growth rate of 3.6%. It remains to be seen if IIP growth can pick up in November 2012, as demand is still not certain in the economy.
Total vehicle sales for November 2012 was up by just 2% with passenger car and commercial vehicles sales showing negative 8% and 7% growth respectively. Vehicle sales have not picked up despite festive season in November and that does not bode well for IIP growth.
Bank credit growth has gone up sharply in November 2012 with credit growing by 2.8% on a month on month basis. Incremental credit deposit ratio has climbed to 76% against levels of 20% seen a few months back. Higher credit growth implies pick up in demand in the economy unless the growth is from refinancing rather than fresh loans.
Exports dropped by 3.9% in November 2012 on a month of month basis while April-November 2012 export growth is down 6%. Weak export growth does not augur well for the economy as it indicates weak global demand.
Tax collections are yet to pick up with gross direct tax collections growing at 7% for the April-November 2012 period against a 15% growth target for the full year, corporate taxes grew by just 3% fiscal year to date indicating that corporate profits are being hit by a weak economy.
US, Japan and Eurozone to pump in money into the system
US Federal Reserve (Fed) announced in its meeting in December 2012 that it will purchase USD 45 billion of US treasuries every month starting January 2013. The treasury purchases are in addition to the monthly MBS (Mortgage Backed Securities) purchase of USD 40 billion that is taking place under the QE3 program (Quantative Easing). The Fed is targeting an unemployment rate of 6.5% (November 2012 levels were 7.7%) with an inflation rate tolerance of 2.5% and it will continue to pump in USD 85 billion of fresh money into the economy on a monthly basis till its targets are met.
Japan is holding fresh elections in December 2012 and the new government is expected to pump in money through loose fiscal and monetary policies. Japan’s GDP growth contracted by 0.9% in the July-September 2012 quarter. Japan’s central bank the Bank of Japan (BOJ) has an asset purchase program of USD 1.14 trillion for fiscal 2012-13 and any increase over that will see more money being flooded into the system.
The ECB (European Central Bank) is ready with its unlimited bond purchase plan to help out fiscally strained nations. The ECB will embark on its bond purchase once it receives the go ahead from Eurozone policy makers. The ECB is awaiting governments to set their fiscal targets before commencing bond purchases.
The flooding of liquidity into the system by three major central banks is positive for equities, as money will flow into assets that offer value and are liquid.