India Economics Cutting 2009 Growth Estimates Again

Global recession deeper than expected earlier:
Sustained credit defaults in many parts of the developed
world are paralyzing the global financial institutions’
ability to deliver risk capital. Cost of capital continues to
remain at higher levels even while GDP growth has
decelerated sharply. The vicious loop of rising credit
defaults, shrinking risk capital pool, slowing growth and
rising unemployment is unveiling.
Capital inflows – critical macro link: While India is
perceived to be relatively insulated in an environment
where the global economy is slowing, investors have
underestimated the dependence of its domestic demand
on global capital inflows. We believe capital flows have
been the anchor of the self-fulfilling virtuous cycle of
higher capital flows — an appreciating exchange rate —
lower interest rates — strong domestic demand growth.
Longer duration of risk aversion in the financial
markets: Risk aversion in the global financial markets
has resulted in a sharp reversal in capital inflows into
India. With duration of risk aversion in global financial
markets likely to be longer than what we estimated
earlier, we are cutting our India GDP growth estimate for
2009 to 5.8% from 6.4% previously. On a financial year
basis, we are forecasting F2010 GDP of 5.7%,
compared with our previous estimate of 6.5%.
The end game is that earnings suffer: The consensus
is currently forecasting 13% and 15% growth in the
Sensex EPS for F2009 and F2010, respectively. We
think that these numbers are likely to be significantly
lower at around 9% and -7.5%, respectively. In our bear
case, we think earnings for the Sensex constituents
could fall 15% in F2010. Financials, materials and
industrials should bear the brunt of the likely earnings
weakness, in our view.