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Changing Growth Engine – CS

November 25, 2008

India’s economic growth engine has not stayed the same for long in the past. Credit Suisse expects investments to no longer be the growth engine from now on. Exports, somewhat surprisingly, could be relatively the fastest growing economic sector for the next few quarters. But why does this Change frequently ? The cyclicality in the savings rate and the frequently recurring twin deficits and profit-oriented private sector are key reasons why India’s growth characteristics change constantly.

Because of the ongoing crisis and wealth destruction, investment-driven growth has been derailed, at least for the time being. Lower interest rates and more liquidity are unlikely to reverse prospects for capital goods companies. It is debatable whether the investment and savings rates of 30-35%, if sustained, could produce a 9% plus sustainable GDP growth rate for years.

Exports are unlikely to grow robustly around the current economic low point, because of weak external demand. However, many export-focused industries could still outperform the other major economic sectors in the next two years, aided by currency-enhanced competitiveness and a larger policymaker focus on stabilising the balance of payment.

Savings and investment rates also have cycles, or at least mini-cycles on a secular trend. Generally, the savings rate has declined during bad economic times for India. The savings rates of corporates and the public sector are much more pro-cyclical.

Credit Suisse is Neutral on HDFC and ICICI Bank. Outperform on HDFc and Underperfrom on Broking Houses. Under perform on the Real Estate Pack. NEUTRAL on Siemens, Thermax, Punj Lloyd and UNDERPERFORM on Cummins. Outperform on IT Pack, FMCG, Bharti Telecom and Dr. Reddys Lab. Neutral on NTPC and Tata Power.

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