Agricultural Growth bounces back

A correction seems to be unfolding in equity markets across the world. The macro data emerging from US is getting bleaker by the day. With unemployment numbers steadfastly staying close to ten percent, the consumption numbers might stay subdued for next several quarters. The bigger pain for the American economy is the state of the housing market. U.S. existing homes in July fell to their slowest pace in 15 years and it is now clear that housing made a false bottom last year. The probability for housing to drag the US economy back into recession is increasing every day. Global equity markets now look forward to next round of quantitative easing which looks imminent followed by some form of fiscal incentives to drive up consumption.

Back home, the GDP growth numbers for Q1 came in at 8.8%, broadly inline with expectations. During the quarter, industry growth was at 10.3% compared to 13.3% (QoQ).The industry growth is expected to come down to 10% in the subsequent quarters due to the high base effect of last year’s numbers. Service sector grew 9.7% versus 8.4% (QoQ) despite a slowdown in construction activity due to monsoons. As construction activity picks up in the subsequent quarters, the Service sector could cross the 10% mark. Farm sector has seen a growth of 2.8% compared to 0.7% (QoQ). This year would see a huge bounce back in agricultural production as the country comes out of a severe drought situation. Leap of Faith would now expect the full year agricultural growth at 3% taking the full year GDP growth to 8.5%.

Direct Tax Code 2010 Bill has pushed back the implementation by one year and the code would be effective only from Apr-12. The Long term capital gains tax stays at zero which comes as a big relief for equity markets. The Bill proposes to reduce the effective corporate tax rate to 30% versus the existing 33.2% rate (30% corporate income tax rate + 7.5% surcharge + 3% cess), with the proposed removal of the surcharge and the education cess. So the proposed rate, inclusive of surcharge and cess is now lower by 320 basis points. However, the effective tax rate for most Indian companies is around 25% so the removal of exemptions means that effective tax rate is likely to go up slightly.

The mid-term review of the 11th five year plan has been announced. The investments have kept pace with the estimates with total capex of 266bn$ in the first three years which is equal to the total amount spent in 10th plan. The five year target has been maintained at 500bn$ with Power generation, telecom and roads sectors expected to make the biggest contribution. The macro numbers announced reinforce Leap of Faith’s view that infrastructure sector is poised to show huge growth in the next few years and remains the most attractive investment bet from a stock market perspective. Leap of faith would use any global turbulence driven stock market correction to increase weight in the infrastructure story primarily in the roads and ports space.