India’s Economic Outlook: Navigating a Temporary Slowdown
India’s second quarter of fiscal year 2025 (FY25) witnessed a slowdown in corporate earnings, raising concerns among investors. Though, experts believe this dip is temporary, pointing to several factors that suggest a robust recovery in the latter half of the fiscal year.
According to Shyamsunder,vice president and senior institutional portfolio manager—emerging markets equity—India at a major financial firm,”the slowdown in corporate earnings in the second quarter ended September was temporary. A recovery is likely in the second half of FY25, aided by an increase in government spending to meet the budgeted target for the fiscal and improvement in rural demand, benefiting companies linked to this theme.”
Deciphering the Q2 FY25 Earnings Dip
The recent earnings season revealed sluggish revenue and earnings growth across various sectors. This aligns with the 5.4% GDP growth, the slowest in seven quarters. Contributing factors include decelerating consumer spending, reduced capital expenditure, and a decline in exports.
Government-dependent companies also experienced challenges. A meaningful drop in central government capital expenditure (capex) contrasted sharply with the 43% growth observed in the first half of FY24. This downturn is attributed to elections and the subsequent government formation process during the initial months of the fiscal year. A resurgence in government spending is anticipated in the second half of FY25,aiming to meet budgetary targets.
While urban demand remains subdued, rural demand shows promising signs of recovery.Increased government spending on programs like the Public Distribution System (PDS), rural development, and agriculture (a 30% year-on-year rise in key ministries) is expected to fuel this growth. This recovery, coupled with the anticipated increase in capex, should benefit related companies and highlight India’s ongoing multi-year capital expenditure cycle.
The Future of Private Investment
Despite recent trends, a positive outlook prevails for private capital expenditure over the next three to five years. Cash capex for BSE 500 companies exhibited a healthy 20% annual growth during FY23 and FY24. However, this growth was overshadowed by the more significant increase in central government capex. Looking ahead, private capex is projected to outpace government spending, driven by factors such as increased capacity utilization and investments in emerging sectors like electronics, semiconductors, electric vehicles, and renewable energy.
Robust corporate balance sheets and readily available funding through equity and debt markets provide a strong foundation for sustained private capex growth.
Franklin Templeton’s Market Strategy
Franklin Templeton employs a bottom-up, valuation-driven approach to stock selection. Unlike the U.S. market, where growth has been concentrated in a few key stocks, India’s market demonstrates broader-based growth. The firm highlights India’s diversified corporate earnings growth over the past two decades as a key factor creating investment opportunities.
The firm expresses optimism regarding the banking sector, citing its attractive growth-to-valuation ratio. In the IT sector, Franklin Templeton has shifted from an underweight position last year to a neutral stance, awaiting more favorable investment opportunities.
India’s Economic Outlook: A Balancing Act Amidst Global Headwinds
India’s economy faces a complex interplay of domestic and global factors. The Reserve Bank of India (RBI) grapples with balancing price stability and growth, while navigating a widening trade deficit and a fluctuating rupee.Experts weigh in on the challenges and opportunities ahead.
RBI’s Tightrope Walk: Price Stability vs. Growth
The RBI’s mandate is clear: maintain price stability while supporting economic growth. However, current inflation dynamics present a significant challenge. while core inflation remains below the target, food inflation has pushed headline inflation closer to 5.5%. “If food inflation were purely transitory, the RBI could overlook it,” explains one analyst. “However, over the past five years, food inflation has averaged around 7% annually. This necessitates a focus on bringing headline inflation closer to the 4% target to prevent inflation expectations from becoming entrenched at higher levels.”
Despite slower-than-expected Q2 GDP growth, the RBI is unlikely to make drastic shifts towards prioritizing growth based on a single data point. A more measured approach, waiting for further economic indicators, is anticipated.
Trade Deficit, Rupee Pressure, and the US Fed’s Influence
India’s record-high trade deficit and a pressured rupee are further complicating the economic picture. The US Federal Reserve’s (Fed) monetary policy plays a significant role. “The Fed has reduced rates by 100 basis points since September and is now expected to make only two additional cuts in 2025,” notes an expert. “Strong US economic growth, persistent inflation, and rising debt levels justify the Fed’s cautious approach to further rate cuts.”
While global uncertainties may create short-term pressure on the rupee, structural factors like robust services export growth and steady remittance inflows are expected to maintain relative stability.”We expect this relative stability to continue,” the analyst adds.
China’s Economic Slowdown and its Impact on India
China’s economic challenges, stemming from factors like cautious consumers and structural weaknesses, are also being closely watched. “Chinese consumers have remained cautious due to structural factors, including inadequate social safety nets, a negative wealth effect, and job insecurity,” explains an expert.”Issues like high inequality and an ageing population have further exacerbated the situation. Over the past five years, Indian corporate earnings have doubled in the listed space, while China’s earnings have declined.” While potential Chinese stimulus might lead to some tactical shifts in investment, India’s long-term growth story remains compelling.
Investment Strategies: A Multi-Asset Approach
For investors, a diversified approach is recommended. “A multi-asset approach is prudent for stable wealth growth,” advises a financial expert. “Fixed income plays a critical role in diversification, offering stability to portfolios during periods of equity market volatility. India’s real estate sector remains in a growth phase, with property prices rising across markets due to low inventory levels. Potential interest rate cuts could further support this cycle. Gold could be allocated as a smaller component of the portfolio,serving as insurance against adverse tail events and enhancing overall risk management.”