 "Improved quality of spending will kickstart investment cycle: Vikas Sharma")
Indian stock markets have been severely impacted by the Chinese downturn. Vikas Sharma, senior MD, president and CEO, Nomura India, tells Joydeep Ghosh that the improvement in the quality of spending by the government, as both capex and subsidy are at 1.7 per cent of GDP (gross domestic product) in FY16 is setting a good trend, which will help kick-start the domestic investment cycle. Edited excerpts:
How badly can the Chinese crisis hit us?
It is hard to say as uncertainty still lurks around China’s growth prospects and the US monetary policy normalisation. Although China’s share in India’s exports is only four per cent and, therefore, the direct impact of a slowdown in China will not be as significant but there are fears that it could drag down growth in the rest of Asia, which could hurt India. In fact, Asia ex-Japan and China, now accounts for nearly 15 per cent of India’s exports — comparable to the US and Europe and, therefore, the spillover impact of China to the rest of Asia becomes crucial to watch.
Nomura’s house view is that December is the most likely timing for the first lift-off and future hikes will be gradual. The terminal US Fed funds rate in this cycle is also expected to be lower. Markets have been fixated on easy money, as the primary driver for asset markets. As this easy money is withdrawn, there will be some hiccups for emerging markets, but there should be a greater differentiation between the good and the bad. And India will stand out as the outperformer, given its improving macros and reduced external vulnerability. However, if the winter session of Parliament is a washout and its timing coincides with the Fed rate hike, it might weigh negatively on foreign investor sentiments in a risk-off environment.
Within emerging markets, how is India placed?
India’s economic fundamentals have not changed; they are getting stronger. While the external situation has become very volatile, domestic factors are turning supportive. The fall in commodity prices is a big positive for a net commodity importer like India. They will boost profit margins due to falling input costs and lower the current account deficit. It will push up discretionary demand and has afforded more time for the government to implement the harder structural reforms, including infrastructure projects, which have longer gestation periods. Inflation has already moderated sharply, creating room for some policy easing. External financing is not an issue with FDI inflows alone being nearly sufficient to finance the lower current account deficit.
Within emerging markets, India actually stands out as relatively less vulnerable to a China slowdown since it is not yet part of the Asian supply chain, it is a domestic demand driven economy and a net commodity importer. Nevertheless, some effect through the trade channel is likely. The benefits from lower commodity prices, lower interest rates and government efforts to clear stalled projects will offset the negative contagion effects from China. We expect the Indian economy to grow at 7.8 per cent in FY16, up from 7.3 per cent last year.
What are the key signals that you are looking at?
On the global front, monetary policy actions from China and US are important. The direction of commodity prices is a key. On the domestic front, government’s progress on reforms especially legislative reforms such as GST, growth outlook, outcome of the Bihar state elections, are some of the key local triggers.
What are the key policy measures which will impact investor sentiment?
When the dust settles, we need to ensure that we are the first ones to bounce back. For this, we need a stable macro environment, which includes low and stable inflation and low twin deficits. We also need continued progress on reforms. To name a few specific things, the government’s ability to push through GST in the winter session, accelerate executive decisions (inviting bids, detailing the terms) to kick-start infrastructure spending, ensure that tax policies are conducive for foreign investors, reduce government stakes in public sector banks are some examples.
To kick-start the capex cycle, public investment in infrastructure has to accelerate and this appears to be underway. The quality of government spending has improved: in FY13, subsidies were 2.6 per cent of GDP, while the central government capex was much lower at 1.7 per cent of GDP. In FY16, even as the government has lowered its fiscal deficit, both capex and subsidy are at 1.7 per cent of GDP. The government has already committed to increased spending on roads and railways with a longer-term vision on how to transform the transportation sector in India. The focus, therefore, continues to be on the quality, and not quantity, of spending.
How badly can the Chinese crisis hit us?
It is hard to say as uncertainty still lurks around China’s growth prospects and the US monetary policy normalisation. Although China’s share in India’s exports is only four per cent and, therefore, the direct impact of a slowdown in China will not be as significant but there are fears that it could drag down growth in the rest of Asia, which could hurt India. In fact, Asia ex-Japan and China, now accounts for nearly 15 per cent of India’s exports — comparable to the US and Europe and, therefore, the spillover impact of China to the rest of Asia becomes crucial to watch.
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US rate hike is another concern. Will it impact FII flows further?
Nomura’s house view is that December is the most likely timing for the first lift-off and future hikes will be gradual. The terminal US Fed funds rate in this cycle is also expected to be lower. Markets have been fixated on easy money, as the primary driver for asset markets. As this easy money is withdrawn, there will be some hiccups for emerging markets, but there should be a greater differentiation between the good and the bad. And India will stand out as the outperformer, given its improving macros and reduced external vulnerability. However, if the winter session of Parliament is a washout and its timing coincides with the Fed rate hike, it might weigh negatively on foreign investor sentiments in a risk-off environment.
Within emerging markets, how is India placed?
India’s economic fundamentals have not changed; they are getting stronger. While the external situation has become very volatile, domestic factors are turning supportive. The fall in commodity prices is a big positive for a net commodity importer like India. They will boost profit margins due to falling input costs and lower the current account deficit. It will push up discretionary demand and has afforded more time for the government to implement the harder structural reforms, including infrastructure projects, which have longer gestation periods. Inflation has already moderated sharply, creating room for some policy easing. External financing is not an issue with FDI inflows alone being nearly sufficient to finance the lower current account deficit.
Within emerging markets, India actually stands out as relatively less vulnerable to a China slowdown since it is not yet part of the Asian supply chain, it is a domestic demand driven economy and a net commodity importer. Nevertheless, some effect through the trade channel is likely. The benefits from lower commodity prices, lower interest rates and government efforts to clear stalled projects will offset the negative contagion effects from China. We expect the Indian economy to grow at 7.8 per cent in FY16, up from 7.3 per cent last year.
What are the key signals that you are looking at?
On the global front, monetary policy actions from China and US are important. The direction of commodity prices is a key. On the domestic front, government’s progress on reforms especially legislative reforms such as GST, growth outlook, outcome of the Bihar state elections, are some of the key local triggers.
What are the key policy measures which will impact investor sentiment?
When the dust settles, we need to ensure that we are the first ones to bounce back. For this, we need a stable macro environment, which includes low and stable inflation and low twin deficits. We also need continued progress on reforms. To name a few specific things, the government’s ability to push through GST in the winter session, accelerate executive decisions (inviting bids, detailing the terms) to kick-start infrastructure spending, ensure that tax policies are conducive for foreign investors, reduce government stakes in public sector banks are some examples.
To kick-start the capex cycle, public investment in infrastructure has to accelerate and this appears to be underway. The quality of government spending has improved: in FY13, subsidies were 2.6 per cent of GDP, while the central government capex was much lower at 1.7 per cent of GDP. In FY16, even as the government has lowered its fiscal deficit, both capex and subsidy are at 1.7 per cent of GDP. The government has already committed to increased spending on roads and railways with a longer-term vision on how to transform the transportation sector in India. The focus, therefore, continues to be on the quality, and not quantity, of spending.