Good News: India's growth cloud has a silver lining

When stock brokers start quoting Oscar Wilde, it's probably a good time to bet on the markets. After the dismal Q4 GDP numbers, some experts are rushing to write the obituary of the India story. So, is this really endgame for India? It seems not.

There's no denying the situation is grim -- with economic growth falling way below potential, investments coming to a standstill and deficits (current account and fiscal) staying elevated. However, even this cloud has a silver lining.

Over the past three months, most commodities have fallen sharply, as concerns over global growth and Europe have resurfaced. European dated Brent is down 21 per cent from $129/bbl seen in March.

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While talks with Iran on its nuclear programme had brought down Brent's risk premium in April, prices have substantially come off on global growth concerns.

In contrast, the rupee has depreciated 11.62 per cent over the past three months and four per cent in one month.

Given that crude, gold, coal, fertiliser and palm oil account for 53 per cent of India's import bill, a fall in these commodities is positive for the trade deficit.

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Another positive is the slowdown in gold imports, which has been a big drag on the trade deficit. Gold imports have substantially come off from 290 tonnes in Q1 FY11 to 207 tonnes in Q1 FY12. Market experts expect imports to fall 30 per cent in Q2 FY12.

If India reduces its gold imports by 500 tonnes through 2012, the pressure on the current account deficit will come off.

There are other encouraging data points, too. For instance, fresh foreign equity inflows have been robust at $36 billion.

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Optimists believe these are being factored in by foreign investors, who have not sold India to the extent they have sold other markets.

Foreign institutional investors have sold Indian equities worth $273 million in May, compared to $3.5 billion sold in South Korea and $3.4 billion in Taiwan.

Despite all this, there's no doubt that Europe will be the game-changer.

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What does this mean for the markets? Morgan Stanley believes the current state of the economy is similar to 2002-03, but the stock-picking opportunity seems as good as in 2003.

Given the noise around rate cuts seems to have only become louder, more support may be coming in for equities from the central bank.

Similarly, Saurabh Mukerjea of Ambit Capital believes, "This is a good time to invest in India as valuations are the most attractive in a decade, leaving aside the quarter following the Lehman bankruptcy."

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