The Modi government has completed one year in office at the Centre. Has the government lived up to the expectations of industry and the market?
Rationally put, some green shoots are becoming visible. Auto sales are rising, air traffic is picking up momentum, various infrastructure sectors like road construction and capital goods are showing slight improvements from their depressed levels.
Luck also favoured Modi, as the fall in global crude prices has been a big help to the domestic economy. A steep fall in global crude prices has been a blessing in disguise, as it has played its part in trimming India’s oil import bill and enhanced foreign exchange savings. Subsequent to this, wholesale price inflation has fallen to the lowest level in nine years by March. The WPI-based inflation has dipped to minus 2.3 per cent in March, compared with minus 2.1 per cent in February. Consumer price inflation (CPI), an indication of consumption expenses, has eased to a four-month low of 4.87 per cent in April from a revised 5.25 per cent in March as prices of food items, vegetables and fruits turned cheaper. CPI is now well within RBI’s January 2016 target of 6 per cent.
Despite the hiccups in Rajya Sabha, the passage of some key bills, including the coal bill, is being seen as a good indication of the government’s focus on reforms. What are your views?
The coal auction has been transparent and seamless. It also generated more money than anyone could dream of. On the external front, the image of India has gone way up in the world at large ever since this government took over. On the defence front, some good things, such as converting the purchase of fighter planes from France into a government-to-government transaction, elimination of scope for kickbacks increased the credibility of the government.
There is a definite momentum, but at a snail’s pace, in terms of structural reforms. The government is not to be blamed for this, as it lacks the required majority in the Rajya Sabha, the real testing place where the ruling alliance is in minority, with just 62 members in a 245-member House. The arithmetic in Rajya Sabha makes one thing obvious that the opposition parties will not let a single meaningful piece of legislation pass.
According to psephologists, the BJP will not be in a position to have required numbers in the Rajya Sabha till 2019. Given the impediments created by the opposition, the BJP has to choose ways and means to win over smaller parties for a conducive policy framework to function seamlessly. Such a move will make the Modi regime more pro-active and reforms-friendly. Otherwise, the policy paralysis may make a comeback.
The stock market has been showing a mixed trend post budget. How long do you think such a trend will continue and what is the way forward?
When we look beyond the revised GDP data, corporate earnings revival has not taken place yet. The quarterly numbers have been pretty dismal. Some of the hiccups have also been due to the clueless approach to the much-awaited retrospective taxation and the recent issues with regard to MAT. The retroactive changes in the rules on foreign investors, though halted later, jeopardised the investment environment by creating suspicions among foreign investors. Haggling over a few billions makes no sense, as India needs huge external investments. In a $2 trillion economy with all the prospects to become a $5 trillion economy in a few years, the government needs to appease investors rather than terrify them with ad-hoc measures.
The most worrisome factor is that the index of industrial production is not showing any sign of revival in industrial activity. Growth in industrial output hit a five-month low of 2.1 per cent in March from a revised 4.9 per cent in February on the back of an across-the-board slowdown.
Though the consumer price in-dices show a trend of consistent decline, the delayed response from RBI on interest rate cuts is taking a heavy toll on industry. The NPA base of the banks is deepening as banks have no practical solution and fresh credit offtake is getting constrained. Technical tweaks of repo rate are not the panacea for economic revival. RBI has to act timely to cut CRR to enable banks to have more liquidity.
Unless holistic structural changes take place, the market may take a breather for the fundamentals to catch up with the stocks rally.
The Sensex briefly touched the 30,000 mark a few months ago and came down after that. Do you expect this mark to be breached in the near future and, if so, which sectors or measures will drive it?
The euphoria over the Modi government’s ascent to power gave the market a 36.5 per cent life in last one year. But for the jubilation to continue, fundamental performance of India Inc needs to do some catchup. When such levelup doesn’t happen, and policy hiccups hinder their performance, not just foreign investors, any investor is going to book profit in search of re-entry at lower levels. Hence, any new high for the market will have to wait for the fundamentals to catch up with the euphoria.
Which sectors do you think will perform better this financial year? Can you elaborate on the reasons?
Automobiles and infrastructure. Infrastructure is the only way through which the government can increase spending and provide a stimulus to the economy. I feel after trying all other avenues, the government may once again focus heavily to clear the decks of heavy infrastructure spending. Further, the auto sector will do well due to a drop in interest rates and a marginal drop in fuel prices.
Despite lack of positivity, valuations of most stocks have hit new highs. Are portfolio investors happy with the present scenario? Where does that leave retail investors?
Most investors are encouraged by the government’s focus on reforms, and they expect that a corporate boom is around the corner. The indicators of business confidence have improved substantially. Of course, there has been a temporary disappointment with the pace of structural reforms. But a toast with hopes for the second year may not be a bad idea. If we go by precedents, Reagan and Thatcher achieved most in their second and third years in office.
The current trend shows FIIs are selling and DIIs are buying. The spook associated with MAT worries and structural reforms may not last long. Investors need to note that the ongoing volatility in the market is associated with too much of day trading. A strong assurance from the government on MAT reversal may once again bring back the sheen in the market. Though valuations are high, a panic-oriented profit booking may not be of use to investors, who collectively pumped in billions of funds into the market in anticipation of reforms and an economic rebound.
[“source – mydigitalfc.com”]