Nilesh Shah is known to be an entertaining speaker, and his views are almost always laced with a touch of humour. Perhaps it’s the delayed monsoon, but the deputy managing director of ICICI Prudential AMC, seems weighed down and tells Shobhana Subramanian he’s uncertain about growth in the current environment. Excerpts:
Have the markets overreacted and were expectations really unduly high?
The markets were probably running ahead of fair value, so clearly there was a need for some correction. If not the Budget, the monsoon would have provided a reason for the crash. This is the first budget where the revenue projections look realistic, if not pessimistic, while the expenditure numbers appear optimistic,and so the deficit could turn out to be close to the estimate. The same Budget could have been presented with Rs 50,000 crore more revenues, Rs 25,000 crore of disinvestment, less expenditure and a deficit of 5.8 per cent and the market would have loved it! Of course, the concerns are legitimate and it would have been better if the government had presented a road map. But there are hints that the government is not averse to disinvestment. Maybe if the market had been at 10,000, these hints would have been taken well, perhaps at 15,000, it’s difficult to connect the dots.
So what will the market be watching for now?
We know that large amounts have been allocated for social spending but they also pass through a leaky pipeline. We need to see whether it is wisely spent because only then will the impact be felt. After all, some of the growth in 2008-09 is the result of the stimulus packages — steel consumption, for instance, did pick up before the elections though it is slowing down now.
Will the high fiscal deficit crowd out private sector borrowings and push up interest rates?
Interest rates will definitely move up gradually but my guess is they will climb about half a per cent over the next six to 12 months, which is manageable. I don’t think the long bond yield will go above 7.5 per cent provided the monsoons are good and the RBI manages liquidity. We believe that borrowings of around Rs 700,000 crore (private sector and government ) can be absorbed, provided there are capital inflows. That should happen because globally money is available and is looking for an opportunity which India can provide.
So what kind of growth are you expecting?
It’s too early to say, but there isn’t much positive news. The monsoon needs to be good. The June quarter would be about 5-10 per cent better than the March quarter because the RBI has followed an easy monetary policy and the government provided a stimulus, and moreover, there was election-related spending. The Budget has put money in the hands of consumers — the spends on the social sector will also release money into the system and if consumers spend, there will be some momentum. We also need to look at capital inflows.
What’s the quality of the FII money that has come in so far this year?
There’s no exact data available but my gut feeling is that the inflows are a mix of money from both long-only funds and hedge funds. Hedge funds have participated heavily in many of the recent QIPs. In some senses, the post–election money is hedge fund money. And India has also got its fair share of emerging market allocations; earlier fund managers were underweight on India but with the election results, the outlook would have changed. Now someone like Stephen Roach has upgraded India over China, and that will have some more impact in the allocation among BRIC countries.
Do you believe India will continue to be an outperformer in the emerging market space like it has been this year?
The Budget would have created some anxieties for FIIs and they would want to see reforms moving ahead and would have to the deficit under control so that there is no rating downgrade. As long as we can periodically give them evidence that we’re moving that way, FIIs will continue to be overweight on India. However, a rating downgrade will hurt us badly from a perception point of view, even if we are growing at above 6 per cent. That’s because there are funds that cannot invest in countries that are below investment-grade; many have prudential limits. And there are also funds that would consider the longer-term fiscal implications rather than growth alone for allocations.
If there’s no downgrade, will India continue to command a premium?
We can command a premium provided we demonstrate that reforms are on track. For one, the actual deficit should be close to the projected deficit. We also need to create an environment to attract capital inflows — foreign exchange reserves need to grow. We also need positive feedback that there’s action on the ground. Earnings are a bit tricky — no one would have predicted in 2007 that for the next three years, earnings would remain constant, but the fact is that for 2008-09 and 2009-10, earnings have remained virtually remained flat, plus or minus1 or 2 per cent. Can 2010-11 compensate for two years of stagnant earnings? It’s difficult to take a call today because we don’t have a clear view on large sectors like commodities, oil and petrochemicals — also, banking is 20 per cent of the index and banks’ earnings are a function of interest rates. All I know is that 2010-11 will be better than 2009-10, but I’m not willing to put a number to it. I will opt for the luxury of letting the sell-side analyst take the call and later say: Okay you were wrong. The fact is that there is uncertainty and we need to wait for both the monsoon and the government’s actions.
At 14,000, what all has the market priced in?
The market is building in some action on the reforms side — FDI in insurance and retail, some amount of divestment, probably no global negative surprise. Maybe, it’s also pricing in a 10-15 per cent kind of growth in 2010-11. I don’t think India is an expensive market at 14 times 2010-11 earnings because there is a chance that next year’s growth in earnings will compensate for the poor growth of last year and this year. Our markets will now follow global cues because there’s no major event except the monsoon. But we will outperform global markets.
Will the removal of tax havens affect FII inflows?
If investors today are expecting a 15 per cent return, they would probably expect a slightly higher return, maybe 18 or 20 per cent, without the tax havens. In any case, there is no tax on long term capital gains. So while there is a small segment that does look out for short term trading opportunities, will people write off India just because there are no tax havens? The answer is clearly no: eventually the costs will get priced in.