The BJP-led government's main challenge is to create jobs by kick-starting investments as this is the only way to boost consumption durably without damaging fiscal discipline, according to Manishi Raychaudhuri, head of Asia-Pacific Equity Research at BNP Paribas.
"Private consumption (57 per cent of India's GDP) has slowed down over the past quarter, anecdotally driven by income uncertainty. It makes sense to focus on consumption, which has been going down," he said.
As the real GDP growth has seen a decline, private consumption in March quarter has also declined, reflecting in the drop of auto and two-wheeler sales.
The Central Statistics Office in its Q3 national account data too had revised down the growth estimate for FY19 to 7 per cent from 7.2 per cent, which is the lowest in the past five years.
Consumer staples too have declined in the last few quarters. "One of the reasons is that this is possibly being created by income uncertainty, going forward.
Rural wage growth has been in the range of only 3 to 4 per cent. We have created an environment of low inflation and that has been engineered by low MSP except for the last one year or so. But in return, it has also depressed the rural buying power," he added.
"Moreover, many companies have cut down production by 20 to 25 per cent and many frontline manufacturers have shut down plants. This is a sign of concern in the near term," said Raychaudhuri.
However, India remains the brightest spot in Asia. "Relative to its North Asian peers, India's earnings trajectory seems better. In contrast to sharp downgrades that China, Korea and Taiwan have seen, India's earnings trajectory seems to have stabilised. The ongoing trade war impacts North Asia much more," he said.
Over a couple of weeks, unexpected escalation in the US-China trade war and the election outcome in India seem to have overturned investors' relative preferences between Asian markets.
Further, there are nascent signs of private investment turnaround like increasing capacity utilisation and declining cost of capital. Decline in cost of capital, though slower than necessary, is supported by benign inflation and easing monetary policy. The RBI has cut rates twice this year, and it should cut rates at least once more, he said.
"This 50 bps rate cut by RBI is just a drop in the ocean. May be they can do a lot more and perhaps adopt policies that facilitate transmission of this rate cut," Raychaudhuri added.
Also, after the ruling BJP's landslide win in the Indian General elections, Raychaudhuri believes the sentiment for Indian equities has improved and expectations about further structural reforms could surge going forward.
He said BJP's success implies policy continuity. "Key economic policy direction - formalisation of the economy and fiscal prudence - appears likely to continue. Some of the disruptive policies of NDA-1 like demonetisation, seem unlikely to be repeated," he added.
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