It's not been a very good start to 2012 so far. India’s been hit with a series of bad news: lowest gross domestic product (GDP) rise (6.1 per cent) in the past 2.5 years, the Congress getting routed in UP and Punjab (resulting in the perception that the UPA can no more push through reforms), a lacklustre Budget, Railway Budget rollbacks, GAAR and now coal-gate threatening to overshadow the 2G scam.
The Union Budget was largely neutral for the markets. It missed the fiscal arithmetic, shying away from major reforms on the one hand, but also refraining from populism and pushing investments on the other. Given that there is only one state election (Gujarat) this year, the FM had the opportunity to push through some hard measures but chose not to.
But is it all gloom and doom? The answer is No. After all, India has attracted a record $9 bn in net foreign institutional investor (FII) inflows in the first quarter, a third of all Asian flows (ex-Japan, China and Hong Kong). Of this, $1.5 bn came after the election results and $446 mn after the Budget. Religare recently concluded a large commercial vehicle (CV) dealer survey. The survey, spanning more than 50 dealers in 25 towns, revealed an improving demand outlook and higher confidence levels. Based on the survey, we have upgraded our medium and heavy CV industry volume growth estimates for FY13 and FY14 to eight per cent and 14 per cent, from five per cent and 10 per cent, respectively.
Every two months, Religare organises roadtrips (The Great India Roadtrips), for its institutional investors to Tier-II & III cities to conduct channel checks and meet local small and medium enterprises (SMEs). Over the past six months, we met several Maruti dealers and received some fascinating insights. The meetings busted two myths — that demand for passenger cars is a function of interest rates and petrol price rises. Oddly, most dealers we met said interest rates no longer impact car sales and the increase in petrol prices are offset by rise in income/salary. Then, why are car sales down 12 per cent year-on-year in FY12? The resounding answer was: It’s the poor sentiment! It’s the same sentiment that has resulted in private sector capex falling from 47 per cent of gross fixed capital formation in 2007 to 39 per cent this year.
So, what can change sentiment? A rate cut by the Reserve Bank of India (will be a huge sentiment booster), reforms such as a practical solution to the supply of coal to power plants and long-pending legislations like GST, DTC and FDI in retail. India remains the best performing market in Asia this year (+13.6 per cent) as the wall of liquidity generated by quantitative easing looks to find a home. Also, India’s rural demand has an uncanny ability of surprising on the upside, and we remain sanguine it will deliver this time, too.
The author is managing director & head of equities,IndiaReligare Capital Markets Ltd