(India File is published every Tuesday. Think your friend or colleague should know about us? Forward this newsletter to them. They can also subscribe here.) Nov 12 - By Ira Dugal, Editor Financial News, with global Reuters staff.
Hello, I'm Ira Dugal and I head financial news for Reuters in India. Join me each Tuesday as I lead you through the biggest stories out of India, and Asia.
Indian corporations have reported weaker-than-expected earnings for the July-September quarter. Are corporate report cards signalling a slowdown in the world's fastest growing major economy? That's our focus this week.
What does Donald Trump's return to the White House mean for emerging markets? Scroll down for "Market matters".
THIS WEEK IN ASIA
** China unveils $1.4 trillion local debt package but no direct stimulus
** Putin signs into law mutual defence treaty with North Korea
** Toyota aims to ramp up China production
** Pakistan limits outdoor activities, market hours to curb air pollution-related illness
A GROWTH SPEED BUMP
Big names in Indian consumer goods, including Hindustan Unilever and Nestle India, were arguably the top disappointments during the past month's quarterly earnings season, when negative surprises and foreign investor selling drove the benchmark Nifty 50 down 6.2% for October - its steepest monthly drop in four-and-a-half years.
That wasn't just bad news for the companies' share prices. It rattled investors with a warning that India's burgeoning urban middle class - a key force driving the world's fastest growing major economy - were reining in spending on goods from soap to shampoo to biscuits and tea.
That could be a harbinger of unwelcome change for an economy accustomed to rapid growth, which reached 8.2% in the last financial year and is forecast to remain above 7% this year.
So far, analysts are seeing the slowdown at least partly as cyclical, a normal reaction after a period of strong growth, rather than as a sign of flagging demand. But they also point to inflation, seen hitting a 14-month high in October on higher food prices, as a more stubborn problem that is eroding urban spending power.
Whether the slowdown worsens or stabilises depends on the strength of rural demand, after a strong monsoon and recent easing of farm policies, as well as the pace of government spending and a possible easing of interest rates by the central bank, which has also loosened its grip on liquidity.
The starkest earnings underperformance was among consumer goods firms, especially those that sell daily-use products to the urban middle class.
Urban Indians, who account for more than one-third of the world's most populous nation, spend 71% more than their rural counterparts, according to monthly consumption data. Consumption comprises 60% of India's GDP.
Nestle India Chairman Suresh Narayan said the market was clearly facing muted demand, as well as pressure from inflation. "Food inflation has been a cause of concern due to sharp uptick in prices of fruits and vegetables and (edible) oil," he told reporters after the company's earnings release.
He noted that growth in the food and beverage sector, in double-digits just a couple quarters ago, is now down to 1.5-2%.
Analysts linked the slower spending growth to a decline in disposable incomes.
India economists at Citi note that growth in inflation-adjusted wage costs for listed Indian firms - a proxy for urban dwellers' earnings - has held below 2% for all three quarters of calendar 2024, and well below the 10-year average of 4.4%.
Not all the earnings news was bad. Colgate Palmolive reported stronger demand from rural areas, while Marico, which sells cooking oil brands popular with rural consumers, said it expects double-digit revenue growth in the second half of the financial year.
Sales of high-end goods also proved resilient. In the auto sector, Mahindra & Mahindra, which sells popular sports utility vehicles, outperformed earnings expectations, although Maruti, with a wider portfolio that includes entry-level cars, was more vulnerable to sluggish demand.
All in all, analysts and economists see the latest quarterly earnings as more bad news than good.
Jefferies India downgraded full-year earnings estimates for 63% of the 121 large companies it covers, the highest downgrade ratio since 2020, when the COVID-19 crisis hit. It attributed that to a cyclical slowdown in the economy.
For the full year, Barclays has lowered its forecast for GDP growth to 6.8% from 7%.
Will growth continue to slip in the second half of the financial year, or will it stabilise? Write to me with your views at ira.dugal@thomsonreuters.com.
QUOTE OF THE WEEK
"I look forward to renewing our collaboration to further strengthen the India-U.S. Comprehensive Global and Strategic Partnership. Together, let's work for the betterment of our people and to promote global peace, stability and prosperity."
Indian Prime Minister Narendra Modi congratulated Republican Donald Trump on Wednesday after he won the U.S. presidential election.
With Trump's win, India is open to freeing up market access for U.S. firms, sources told Reuters.
MARKET MATTERS Investors hoping for a "Goldilocks" moment for emerging markets in 2025 are facing significant uncertainty after the U.S. presidential elections.
The dollar's rigorous rally, higher bond yields and the prospect of the Federal Reserve slowing the pace of interest rate cuts weighed on emerging market currencies.
Asia could be surprisingly resilient in the face of this increased uncertainty. Investors may also look for safety in Indian assets, given its domestically focused economy.
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(By Ira Dugal; Editing by Edmund Klamann)
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