Murphy's law states: "Anything that can go wrong will go wrong". This seems especially true in the context of Indian economy and Indian equity markets in the past year. Last year this time, India was grappling with an imminent sovereign downgrade, with an uncontrolled fiscal deficit, policy paralysis of the highest order with no economic reforms for eight long years and a weakening rupee. With Chidambaram coming back to the finance ministry, measures were announced to tackle the fiscal situation. We saw government spending being curtailed, foreign direct investment allowed in several sectors like retail and aviation, and a more benign monetary policy. Several policy measures were undertaken to cap fiscal deficit. The fuel price deregulation announced in January is probably the most significant reform measure in the last five years and will have significant positive long-term impact on the economy. This combined with severe expenditure curtailment, led to a better than expected fiscal deficit number for FY13.
With the Reserve Bank of India easing monetary policy, it was expected GDP growth would revive, although slowly, from the five per cent levels of last year. And just when things seemed to be looking up, we had an eight per cent fall in rupee value through the month of May and June which changed the overall macro picture.
India is not alone in the currency carnage which was triggered, partly by the US Federal Reserve's comments on tapering on Quantitative Easing. However, India is most vulnerable due to the high deficit levels on both fiscal and current account. RBI has been forced to intervene and carry out monetary tightening to defend the rupee. These monetary policy measures are going to slow down economic activity further and a recovery is now pushed back into 2014. We are now expecting gross domestic product (GDP) growth of around five per cent for the financial year. Equity markets have reacted with banking and automobile stocks taking a big hit. However, the broader market has been resilient, with the Sensex within five per cent of its all-time high.
We believe all possible negatives which could happen have played out. One can add a fractured electoral outcome as another potential negative. However, no one is expecting a very decisive mandate from elections next year, so expectations are already low. There is not much that can go wrong from here. We have GDP growth, currency, current account deficit all at a decadal low. Things can only look up. Growth should get a boost once these temporary measures by RBI are withdrawn. We see more actions on the import side, which will also help stabilise the rupee.
It's difficult to see the sunshine when dark clouds gather. A good monsoon, commodity price correction, a strong macroeconomic recovery in the US and a stable euro area are significant positives for equity markets this year. We expect Indian companies to deliver a 10 per cent earnings growth this financial year and remain positive on equity markets, with a potential 15 per cent upside from these levels by the end of the year. We expect a few industries to outperform dusting these times of the dark clouds. We expect the pharma, information technology, automotive and private sector banks space to outperform the market in the next two quarters.
The author is head, PMS, Karvy Private Wealth
