In a way, India continued with CAD above 2% of GDP. Current Account Deficit (CAD) narrowed to $14.3 billion for June 2019 quarter. The current account deficit at 2% of GDP was a better performance compared to the CAD at 2.3% of GDP in the Jun-18 quarter. However, the CAD was higher compared to 0.7% recorded in the Mar-19 quarter. The marginal fall in CAD was despite a higher trade deficit. The services exports put up a better performance and inward remittances showed sharply positive growth. In US dollar terms, the CAD continues to be the third highest after the US and UK.
Infrastructure growth sees the biggest pressure in the last 4 years. Core sector growth for August 2019 comes in at a 52-month low of (-0.5%). It was the worst performance since April 2015 as 5 out of the 8 core sectors reported negative growth on a YOY basis. Only fertilizers, refinery products and steel sector clocked positive growth in August. Among the losing sectors were coal, crude oil, natural gas, cement and electricity. Core sector accounts for nearly 41% of the IIP and hence is an important lead indicator of growth. The stress has been especially severe on the hydrocarbons segment.
Despite the tax giveaways, the government has stuck to its borrowing program. Indian government will not increase borrowing in the second half. The government will stick to its original borrowing plan and limit itself to Rs.268,000 crore for the second half of the fiscal. Markets were worried that the borrowings would shoot up due to the corporate tax cuts. However, the government proposes to finance the gap through better compliance, strategic sale of PSUs and larger dividend payouts by the RBI. Revenue management continues to be a challenge for the government.
The markets were led lower by the vulnerable banks and the NBFC space. In fact, Sensex took a hit as vulnerable financials faltered on Dalal Street. The stock markets were in the red although it did manage to recover towards the end. According to an ET report, the pain was felt the most in stocks like Indiabulls Housing, Yes Bank and IndusInd Bank. While Indiabulls got hit by RBI shifting LVB into prompt corrective action, Yes Bank and IndusInd fell sharply on questions over asset quality. IT and FMCG were the gainers for the day as a lot of defensive buying was visible in these sectors.
Brent crude closes 176 bps lower at $60.82/bbl and has entirely reversed the sharp rally after the drone attacks. Aramco did bring factories back to 100% production before schedule. Trump’s impeachment raises questions over the progress on trade talks. But markets were most worried about weak economic outlook for the world’s largest crude importer; China. In India, the Government cut gas prices by over 12%; the first price cut since April 2017. This was a bid to pass on the benefits of lower oil prices to the user industries. The government cut the price of gas in difficult oil fields from $9.32 to $8.43, while the price for gas produced from the fields of ONGC and OIL has been cut from $3.69 to $3.23 per million BTU. Gas rates dictate revenues of gas producers and costs of users like fertilizers and CNG producers.
In the midst of the latest comments coming from Trump, China has warned that delisting Chinese shares from US bourses would escalate trade war. With the latest US threat of delisting Chinese shares and asking US companies to shift out of China, the Chinese trade delegation is not too pleased. They have warned the US that it could only prolong the internecine war. This could be a major setback for China since many of its marquee companies like Alibaba, JD and Tencent have managed attractive valuations only due to their US listing. That would have been impossible in Chinese markets.
