During the past five years (F2003-2008), India has received cumulative inflows of US$224 billion. This serviced India’s biggest ever credit and capital spending cycle. India’s outstanding credit grew from US$189 billion in March 2003 to US$643 billion by March 2008. Over that time, the country spent US$1.4 trillion on investment. It’s no surprise that growth accelerated and averaged nearly 9% during this period.
India’s infrastructure was not ready for this growth, and combined with the surge in global commodity prices (again reflecting unprecedented global growth for mostly the same reasons), inflation surged – a classic case of overheating. Of course, the Central Bank took prompt action, but it has left us with a cyclical slowdown in growth. If capital flows recede, a natural outcome of the ongoing global crises, India’s growth will hurt further.
During the same period, the BSE Sensex constituents on aggregate, have grown earnings fivefold in five years from Rs247 billion to Rs1,215 billion. If earnings fall in the coming quarters, it should surprise nobody. Morgan Stanley expects broad market earnings to decline by 10%-15% in F2010 and ROE to decline in the coming 18 months. India still trades at a premium of 25% to emerging markets.
What will be a Big Booster to the Market:
Global Economic Crisis should Calm down.
Credit growth needs to go below deposit growth for a sustained period so that banks’ balance sheets become more liquid.
Infrastructure Spending: The government will need to boost infrastructure spending and also cut tax rates. This cannot be funded using public debt and hence as corollary government will need to privatize assets or raise multi-lateral agency loans.
Election Verdit – India should avoid a fractured verdict.
Morgan expects earnings to grow 2% in FY09 and fall by 10% in FY2010.