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How are you pitching the Indian story to foreign investors this year, considering markets had risen 25% last year?
The theme remains the same---growth, though of late, it has been elusive for India. Now, the big issue for investors to focus on is whether growth would be back on track, given a lot of issues such as fiscal deficit, investment deficit, current account deficit (CAD) and at a more general level, weak governance in the past few years, though it has improved in the past few months.
Clearly, 5 to 6% growth wouldn’t address India’s challenges. It wouldn’t address issues such as creation of adequate employment opportunities and eradication of poverty. So, the focus of the government should be to bring back growth in the context of all the macro challenges. On the fiscal side, the government is clearly tightening (diesel prices have been raised, Plan expenditure has been cut), which cannot be good for growth.
The Reserve Bank of India has not cut rates as people would want it to, as it is constrained by inflation. Also, by October-November, we have four major state elections (Delhi, Madhya Pradesh, Rajasthan and Chhattisgarh). A lot would depend on how the Congress fares in these states because it’s possible the Congress may not do well in Madhya Pradesh and Chhattisgarh. So, that would also influence politics and the government’s economic policies after that.
In your earlier reports, you had written the government was making cosmetic changes to address big issues such as fiscal and current account deficits. Did the government’s recent moves change your stance?
Absolutely! We have finally started tackling the real issues. Increasing the FDI (foreign direct investment) limit in a few sectors was a positive, but there was a need to follow it up with real reforms. The first right thing the government did was its attempt to align fuel prices to market levels, which would address fiscal deficit issues, partially in the medium term.
The second level of reforms, which would be more difficult to implement, would be deregulation of the factors of production such as land and labour, India’s next challenges. The third area of reforms would be addressing governance, corruption, lower role of the government in the economy, etc. These would be really difficult to implement.
What are your expectations from the coming Union Budget?
The government would have to play a balancing role in this Budget. On the one side, it would pursue fiscal consolidation because the finance minister is already committed to it. He has to be careful about what signal he sends to investors and rating agencies. On the other hand, it has to take care of growth as well. The issue is how the government manages both.
So, I will be very surprised if general tax levels rise, because consumption is slowing. The government’s focus has been on the expenditure side, on issues such as diesel subsidies and Plan expenditure. It has also been ruthless in cutting Plan expenditure through the past few months. As of December 2012, Plan expenditure rose only seven% (versus an estimate of 26% in the Budget). This has an impact on growth.
So, there could be selective increases in taxes, maybe on gold imports or cigarettes. The government could also raise duty on crude oil but keep the duty on products unchanged. In such a case, companies’ refining margins would be squeezed. Though the subsidy numbers wouldn’t change, the government’s revenues would rise. Finally, there would be lot of focus on savings and investments.
Against this backdrop, would foreign portfolio flows continue this year, as was the case in 2012?
So far, these have been coming and we can only hope and pray these continue to flow in because India is running a structural CAD. CAD numbers are quite worrisome. Every quarter, India is running about $20 billion of CAD. So, we need $14-15 billion of portfolio capital inflows every quarter. These flows largely depend on sentiment—strong global liquidity, global sentiment and sentiment for India.
From India’s perspective, the government has to do the right things because the global environment is quite supportive; there are signs of economic recovery and liquidity is quite strong. So, as long as India can make the right noises and do the right things, it can attract money.
So, what are you pitching to investors?
Most growth stocks are looking expensive, whether these are private retail banks, automobiles, consumer staples and pharmaceuticals (to an extent). And, we are not seeing any improvement in underlying trends such as volumes, pricing, profitability and banks NPLs (non-performing loans).
So, it is hard to argue for a re-rating for stocks. In investment-related sectors (construction, industrials, infrastructure), there is hardly any recovery and things are probably worsening. The only solace is these would be able to do de-leverage their balance sheets by selling their units or raising money from the capital markets, if global liquidity conditions are supportive..
