 "Neelkanth Mishra")
What is driving your optimism about India?
You have to differentiate between the market and the economy. I think the market is doing well because of global factors. The Indian economy has a lot of potential for growth and it is hard to make us grow less than five per cent. Therefore, if the global appetite for equities improves, it is inevitable that money will come into India.
India’s growth prospects are stronger and more certain now. For any investor taking a multi-year view, there were two tail risks. The first was the currency — its 60 per cent fall from 2007 against the dollar wiped out a lot of gains. The last thing you want is a currency crisis. The second risk was that governance would falter; the (recent national) elections removed that risk. With those two risks gone, we have started reflecting what global equities have been doing anyway.
When did you turn positive on India and why?
In April 2013, when I found the price to earnings premium of MSCI India to MSCI World (both indexes published by the US-based provider of equity, fixed income and hedge fund stock market indexes, and equity portfolio analysis tools) had fallen to a nine-year low. Till early September this year, it had only come up marginally from there, though the decline in global equities since then has pushed it up a bit.
There is a widely held belief that Indian equities have done well due to the change in government but if you see the MSCI India PE premium to MSCI World PE, it has barely moved. So, what we are seeing in India is a reflection of the global preference for equities. Investors are now able to take a medium to long-term view on India.
What are the risks to the market?
The risks are bigger from global factors – of late, markets globally have been very volatile and there is a lot of turmoil in global commodities. All economies supplying to China are getting beaten, as its medium-term growth outlook is moderating. The same goes for Europe. India, on the other hand, now has a balance of payment surplus and the Reserve Bank of India is struggling to sterilise the inflows. India is holding up well. So far, the correction has been orderly but going forward, a number of people believe this can be disorderly. If that happens, the Indian market would be at risk, too.
The Bharatiya Janata Party (BJP) has emerged the dominant party in two state elections. How do you see this impacting reforms?
There are three key implications of the results. The first is reinforcement of the lesson that an election campaign based on jobs, growth and anti-corruption works. The second is that Maharashtra and Haryana are together 18.5 per cent of India’s gross domestic product and so, almost half of India's GDP is now in states ruled by the BJP. This is a remarkable statistic. My view is that most of the critical reforms and even implementation of many of the promises made by the BJP in May are dependent on state governments.
The third is that only 11 per cent of India’s population now lives in states run by the Congress, a historic low. This changes the shape of central politics. Stable ruling coalitions at the Centre can only be stitched around parties with a national presence. The BJP has become the only alternative, so, national politics has changed sharply, even if you use 2009 as a benchmark.
What is your view on the recent increase in gas prices and deregulation of diesel prices?
Diesel deregulation, for now, didn’t involve any political risk, as underrecoveries were near-zero anyway. But taking advantage of when you get thrown a full-toss is also important and it's good the government used the opportunity. Conviction levels will increase once observers see the government persisting with it even when crude oil prices are rising.
Given all the debate around it over the past several years, it is now clear that there is no objective formula to decide the fair value of gas. The principle is clear — there need to be some incentives but not super-normal profits for the developer.
When do you see the investment cycle reviving?
This might take another two to three years. Investments will keep happening but when you look at the overall cycle, you have to see where the size and heft is. Power, metals and roads have traditionally been the big movers and the first two have serious problems that will take many years to resolve.
Which sectors do you like and why?
We had written this note recently, called the 'Basket of abundant growth', where we started with the same argument, that India is decades behind the emerging markets (EMs) and India doesn’t have those issues that many EMs are facing. We highlighted three themes for investment. The first was wholesale funded banks and non-bank finance companies. The second was consumer discretionary and staples companies. The third were the beneficiaries of a weak rupee. Finally, some of the mid-caps like water processing due to environmental issues. Or housing construction — there are tiles companies. So, there are lots of sectors where there is still good growth.
When the BJP came to power, they also spoke of reforming the PSU (public sector undertakings) sector. Do you foresee any action?
Reforms of this kind do take a long time. Reforming smaller companies will not make much of a difference, so when you talk about PSU reforms, it is a tough task, whether it is the railways or PSU banks or Coal India, I think these are the ones that will affect the economy. How do you correct something as systemic? These kind of reforms will take time.
