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Your expectations from the Budget?
It is the first big policy document from the new government and expectations are high. However, there are certain things where people want clarity. First, that growth and inflation are addressed simultaneously. The second is the road map on fiscal consolidation for the current and next year. The path has to be clear – whether inflows initially will be boosted by stake sale in public sector units or through Goods and Services Tax implementation or others such as tax amnesty schemes. On the expenditure side, what are the subsidies the government wants to cut, which have been a big source of problems.
Then, decisions on economic revival. This can be through specific tax incentives for getting the desired returns. Fourth, how do you deregulate the banking sector? Apart from the above, capital market reforms for both the debt and equity segment need to be looked at, like mechanisms to reduce dependence on foreign inflows in the stock markets, and baby steps channelising long-term savings growth through financial instruments. Financial savings as a percentage of savings are at a 30-year low. I hope they address some of the issues, if not all, that are crucial for the country.
In the current scenario of high inflation and high interest rates, how do you see growth? What are the other key challenges?
We have moved from low growth to slightly higher growth. Inflation needs to be tamed before interest rates are eased. Historically, we don’t have much of data points to show that growth can happen with high interest rates.
However, don’t focus on nominal but on real interest rates. If real interest rates are low, the economy improves. We have had negative interest rates till recently, as inflation was higher than nominal interest rates. Strategists and market experts are trying to see how to revive growth. We might not have a fresh cycle of growth now but pending projects of the previous growth cycle might provide impetus and drive the initial phase of growth. However, the government’s decision on the pending issues is important. The Budget will delineate the policies which can give the map on how India can move from 4.5 to 5-6.5 per cent annual GDP growth.
When do you see interest rates coming down?
Inflationary pressure is beginning to ease. Initially, a weaker rupee was keeping pressure on inflation. Now that the rupee has stabilised, crude oil prices are under pressure. Similarly for agriculture produce, the minimum support prices (MSP) in the past five years have continued to rise, which added to inflation. It is this year when the government only raised MSP marginally. Third reason for inflation was wage increases in rural India, due to the rural job guarantee. The broad expectation is that interest rates will start coming down in the second half of FY15.
How do you rate the performance of the government thus far?
A good beginning is half the job done. Some of the clutter in decision making — GoMs, EGoMs, various cabinet committees have all been abolished. The government is trying to shorten the decision making cycle and making it easier. The second thing is to reduce the trust deficiency between corporate India and the government, which was stretched in the past three to four years.
Some policies of the previous government were also good and have been continued, such as the excise duty cut window. It indicates the government has recognised that the economy needs its support; they are also making efforts to move from a subsidised to a freer market economy. This is a positive step.
However, issues like deferment of the gas price rise also indicate the challenges that lie ahead. There are complexities involved in taking such decisions, so expecting a big-bang announcement which might satisfy some pockets of the market without fully understanding the deeper ramifications would be unjustified. The deferment shows the challenges involved.
What are the risks to the markets now?
After the initial optimism, people will be taking measured and careful steps. They will be looking at policies and parameters and take a calibrated view. Nevertheless, the sentiment remains strong and government’s steps will drive further moves. Barring risks such as high prices or some issues with China that can spook emerging markets, I don’t see the risk of large outflows from the markets; a steep correction might not happen. Lower or failed monsoons might temporarily affect the growth and be a near-term dampener.
During the revival phase of the economic cycle, consumer discretionary segments such as automobiles, consumer durables, construction companies and material do well. So do industrial sectors such as capital goods, engineering and banks. The acceleration of these from low growth to higher growth will translate into stock price movement. Defensive sectors will now take a back seat. Economic revival will continue for a few years, so cyclicals will continue to outperform. They will grow at a higher pace compared to pharmaceuticals, information technology and consumer staples.
What is your advice for retail investors?
They should first get their allocation right, as most are under-invested in equities. The primary message is to normalise exposure to equities, which can be done through diversified equity funds. Once asset allocation has been set right, then only move from large-cap funds to sectoral funds.
Which are the sectors that are your top picks?
We are very positive on financial services - be it banking, insurance, NBFCs or rating agencies. The cement sector that had been struggling from excess capacities and couple of years of growth going ahead will lead to improved capacity utilisation and better profits.
Right now, some volume growth is being factored in, though pricing power or better realisation will drive next level of growth and profitability will improve drastically in the backdrop. Thus any correction on account of monsoon related fears should be used to enter the space.
In the automobiles, two wheelers will see better growth initially. However, cars (four-wheelers) can easily catch up pace and see double digit growth followed by commercial vehicles.
