Has Asia’s Investment Darling India Lost Its Way?

Indian stocks have been stellar performers since late last year, up 25.1% between Nov. 22 and the start of August. That was the second leg of a run of strength that stretches back to early 2016. 

India’s growth has also been the best among major economies. Gross domestic product ran up 7.9% in 2016.

But that growth figure sank to its lowest rate in almost six years in the second quarter, at an annualized rate of 5.7%. Stocks have lost their legs of late, down 3.8% in the last couple of months. Why?

There have been dual headwinds that have slowed progress. The abolishment of 86% of the cash notes in circulation last November affected this year’s second-quarter figures in particular. India has also implemented a nationwide sales tax, which while simplifying things in the long run has been very hard to put into action.

The loss of output and jobs as a result of demonetization has vastly outweighed any benefit, in the eyes of Société Générale economist Kunal Kumar Kundu. Meanwhile, the General Sales Tax has, surprise surprise, been overly complex to put into place.

As a result, SocGen revised its forecast for fiscal 2018 growth to 6.9%, down from the original 7.2%. It expects growth to climb after that, but only slowly.

While GDP figures fail to capture the true size of the cash economy and black market, the continued slowdown in manufacturing is “testimony to the debilitating impact on the economy,” Kundu says. The only positive to come out of demonetization is the sharp drop in lending rates at banks, which were inundated with cash that had to be returned to financial institutions if it was to retain any value.

The sales tax went into effect on July 1. Retailers offered heavy discounts in June in an attempt to get rid of old inventory. Goods accumulated before the launch of the sales tax only benefit from a partial credit on the new sales tax rates.

The destocking also bashed manufacturing output. Industrial production fell 0.9%…

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