The International Monetary Fund (IMF) has cut India’s growth target by 30 bps for next two years. This could be a setback for the India growth story; IMF has downsized India’s GDP growth for 2020 and 2021 from 7.3% to 7%. IMF has pointed to subdued domestic demand, weak consumption and the external impact of the trade war as reasons for the downgrade. IMF also pointed to the weak financial structure but maintained that India would be among the best growth stories. The downgrade of growth was almost inevitable after the economy grew at just 6.8% in the previous fiscal year.
On his last day in office, Dr. Viral Acharya issued a warning to the financial markets that government borrowings could squeeze private sector funding sources. Dr. Viral had actually demitted office 6 months ahead of the end of his official tenure. Dr. Acharya pointed out that sharply higher domestic borrowings by the government would not only lead to risk-off investor preference but also lead to higher yields and raise the borrowing costs. It could also make rate transmission more difficult. Dr. Acharya was basically cautioning the government against too much domestic borrowing.
On the stock markets, it is now the leaders that are driving the markets lower. The Nifty weakened further as financials dragged the markets lower. Major financial stocks commanding premium valuations continued to be under pressure on Tuesday. There were worries over lower rate cut by the RBI and the Fed as well as a rising incidence of stressed loans. In fact, the HDFC twins and the Bajaj twins came under pressure. There were also concerns that the consumption slowdown could bring about real pressure on future growth. Of course, the initial results from FMCG were quite encouraging.
Is that really good news for the Indian economy? Crude Oil imports into India fell to a 2-year low in the month of June 2019 by 13.4% to 16.87 million tonnes. It was about 19 million tonnes in the corresponding period last year. The fall in imports was largely on the back of sanctions on Iranian oil. Normally, monsoons reduce the need for diesel to run irrigation pumps. However, the imports of oil products surged by 20% in June on a YOY basis. Exports of crude and oil products from India showed negative growth in June on global trade war worries and that remains a major concern for India.
In what was almost a foregone conclusion, the Congress-JDS government lost its trust vote in the state of Karnataka. The H D Kumaraswamy government suffered a major setback after its government lost the confidence vote in the assembly and polled just 99 votes, against 105 votes for the BJP. Over the last few weeks, a large number of MLAs from the Congress and the JDS had shifted loyalties to the BJP and consistent efforts to woo them back had failed. While technically, the BJP can now form the government, it is still not clear whether the MLAs who left the parties would really attract the provisions of the Anti-Defection Bill. In that case, these MLAs may have to resign their positions and seek a fresh mandate from the people. Alternatively, the governor may also call for fresh elections in Karnataka.
Boris Johnson will now take over as the next prime minister of Great Britain. Johnson, the former mayor of London, has been a hardliner Brexiteer and has promised to exit the EU by end of October. He has affirmed that this would happen; with or without any deal. Johnson won the race to head the Conservative party by ratio of 2:1 after Theresa May submitted her resignation. Johnson will also work closely with the BREXIT party led by Nigel Farage. While all the posturing is fine one side, the real issue is the economic costs of BREXIT which none of the British politicians are really talking about?
