After an unexpected bull-run in the first two months of 2012, there was a spate of negative news for the markets — miserable performance by the Congress in the UP state elections, a Budget that was a damp squib and crude oil prices that remain stubbornly high. Understandably, bulls are down, but I do think that they are out.
Notwithstanding a politically weak government’s inability to push through any reforms, the Indian economy remains buoyant. Consumption-led growth continues. The government’s spending drive, mainly in rural areas, is putting tremendous pressure on fiscal deficit and public finances. Yet, it is driving growth the way Lord Keynes would have recommended in his General Theory of Income and Employment. As elections are due in less than two years, we are likely to see unabated government spending. One can argue that investment-led growth would sustain employment generation for a longer period of time, and at this stage of development of the economy it would be a healthier option. Still, even if the economy grows at 6.5 per cent to seven per cent, it remains, in relative terms, one of the fastest growing economies in the world. Despite all the noise of high interest rates and rising crude oil prices, there has been recovery in car sales and telecom subscription numbers in January and February. Besides freight, cement dispatches have also registered healthy growth.
While fundamentals of the Indian economy are robust from the long-term perspective, global liquidity conditions are favourable, at least, in the short term. Low interest rates in the US have been driving huge fund flows from that country to emerging market equity, by way of carry trades. Amongst emerging markets, India is an attractive destination. Foreign institutional investor (FII) flows to India have already crossed $8.8 bn YTD, which is higher than in most other emerging markets. The biggest competing nation for foreign capital, China, is slowing, at a faster pace than most had expected.
Politically, uncertainty around the Uttar Pradesh elections and the Union Budget for 2012-13 are now behind us.
The young leadership, like that of Akhilesh Yadav in UP, is likely to emulate Gujarat and Bihar, the two states that have witnessed good governance, driving real GDP growth at double digits. With consensus estimates of 14 per cent growth in earnings next year, the risk of further downgrades is very limited. There are indications that core inflation is decelerating. The cut in cash reserve ratio (CRR) has already begun and one can reasonably expect more cuts in CRR as well as repo rate. As interest rates start falling, we should see the investment cycle picking up. To summarise, there are more reasons to be bullish than bearish in 2012.
The author is chairman, India Infoline
