Slow growth threatens India’s economy
Growth in the Indian economy slowed further in the second quarter; a rate of 5 percent is the lowest for six years.
The more subdued growth is also starting to have consequences, such as shrinking production, higher unemployment and lower consumption at multiple levels. Auto sales for Maruti Suzuki fell 33 percent compared to the previous year.
Several manufacturing companies are cutting their workforce by laying off temporary staff. The banking sector warned in the first quarter reports that losses from bad debt in consumer lending will rise. Axis Bank’s losses on consumer lending have risen to 4.1 percent of the total borrowing by this group.
The government responded by taking steps to slow the trend. A new penalty tax for foreign investors was abolished. A previously planned tax increase on new car sales was removed. Small and medium-sized companies will receive VAT refunds without delay. State banks will be recapitalised. The central bank is contributing an extra dividend to cover the government’s budget deficit. All in all, no new money is being added to the economy but existing funds are being reallocated as best as possible.
The valuation of the stock exchange is at 19 times annual earnings, while more and more companies are issuing profit warnings. Expected profit growth for the full year is being revised downward to around 5-10 percent at best. The Indian central bank is expected to lower interest rates at its next meeting in September, which may provide some support.
During the month, we decided to reduce the fund’s exposure to the banking and finance sector. The holding in Axis Bank was entirely sold. Holdings in HDFC Corp., Icici Bank and Bajaj Finance were reduced. Instead, investments in Reliance Industries and Infosys were increased. The fund also upped its position in Nestle India.