Ambitious reforms, but negative effects
The Indian market was hesitant in June, and fell back. Carnegie Indienfond fell 2.0 % and is up so far this year by 10.4 %.
India is showing clear signs of economic slowdown and, despite the government’s progress with economic reforms over the past five years, growth is weaker at GDP level. In fact, the reforms have had a short-term negative impact on growth as the changes have affected the ability of companies and households to invest and consume.
The currency reform of 2016 hampered private consumption, and the national VAT rate introduced in 2017 made it difficult for small and medium-sized companies to finance their operations. We are today seeing the effects of the government’s ambition to clean up the banking system over a relatively short period, and last September a semi-state infrastructure finance company failed. This had a major impact on liquidity in the financial sector as finance companies found it increasingly difficult to roll over their borrowing. Consequently, Dewan Housing Finance is now in difficulty and is having trouble meeting its loan payments. Most large commercial banks have exposure to Dewan Housing Finance, which means the problems are spreading throughout the system.
Carnegie Indienfond has no exposure to these companies that are less well managed, but it does mean that banks may need to increase their provisions for future loan losses.
Domestic consumption is an important engine for India’s growth, but there has been weaker demand for cars, motorcycles, capital goods and groceries over the past year. One explanation is that farmers have been paid less for their grain, which negatively impacts their purchasing power. Almost all capital goods in India are purchased with financing, and unless finance companies can arrange borrowing, customers are unable to buy cars, which has a direct effect on consumption.
This is what we are seeing the result of now.
Carnegie Indienfond sold its holding in Indusind Bank and reduced its holding in Axis Bank. Food company Nestle India is a new addition.