Tuesday July 26, 2022

India Brief July 2022

The BJP has had a good few weeks politically

Politically, the last few weeks have brought a spate of good news for the BJP. It won Lok Sabha by-elections in two Samajwadi Party (SP) strongholds in UP, signalling that its grip over India’s most electorally significant state is not just holding steady, but strengthening. In Maharashtra, a rift within the Shiv Sena came to the fore, bringing down the ruling tripartite alliance, which was then replaced by a Sena-BJP alliance with ex-CM Devendra Fadnavis as Deputy CM. Meanwhile, the upcoming Presidential election, which initially promised to go down to the wire, has become a virtual no-contest. The BJP opted for Droupadi Murmu, a tribal woman who is sure to draw in votes from several fence-sitting, non-NDA parties.

The Agnipath scheme is likely to yield political gains, despite the protests around it

A newly announced recruitment scheme for the armed forces, Agnipath, triggered mass protests but promises longer-term electoral gains. The protests centred around the limited, 4-year tenure of the so-called ‘Agniveers,’ who will receive a fixed, one-time package when they demit service rather than an annual pension. However, the details are likely to be forgotten as employment creation by the scheme blunts some of the discontent around youth joblessness. With Parliament’s Monsoon Session scheduled to begin on July 18^th, the opposition will have a choice of issues over which to hold up proceedings: Agnipath, rising prices and a simmering diplomatic row over controversial remarks by two BJP spokespersons.

Outlook for the Market

Growth seems to be holding up, for now…

The headline numbers suggest that India’s economic recovery remains on track. GST receipts stayed above the Rs 1.4 trillion mark in June for the fourth month in a row, albeit boosted by rising input costs and end-prices. With supply-side issues gradually resolving, auto sales are also looking up. In June, all of the major carmakers barring Maruti Suzuki reported big YoY increases, though off a low base. 2-wheeler and commercial-vehicle sales also gathered pace, though tractor sales were down. Rising input costs weighted down on the IHS Markit Manufacturing PMI, which dropped to a 9-month low of 53.9, from 54.6, but the Services index leaped to an 11-year high of 59.2, boosted by strengthening demand conditions.

…but global monetary tightening is dragging down the rupee and may impact the forward trajectory

On the downside, persistently high inflation will eventually impact consumption and hence growth in the coming months. The RBI has hiked the Repo by 90 bps and, according to most analysts, may hike it by another 100 bps before March 2023. This will hurt domestic consumption while also exacerbating portfolio outflows, which already total USD 30 billion so far in 2022. Meanwhile, India’s current account deficit (CAD) touched 1.2% of GDP in FY22, compared to a 0.9% surplus the previous year. The trade deficit continues to widen too, touching a record USD 25.6 billion in June. Together, FPI outflows and the worsening trade numbers have pulled the rupee down to new sub-79/USD lows, despite the RBI’s intervention, and further depreciation remains inevitable.