INSUBCONTINENT EXCLUSIVE:
India has seen a perfect storm in first nine months of 2018, created by oil prices, interest rates, rupee, banking liquidity, credit events
like ILFS and FII selling
With some luck and some deft management, now economy is in a reasonable shape
Oil prices are down and are likely to remain stable
The rupee is near its fair value
It will depreciate but at a reasonable pace
Interest rates have declined 75 basis points and are likely to remain range-bound
FIIs have turned from consistent sellers to occasional sellers
Liquidity is still short, though open-market operations and forex-market intervention can bring that to a neutral level
The ILFS event has been contained
And, most importantly, market valuations have corrected sharply and are around their historical average.
The market has a near-term concern
There is a distinct shift towards populist policies like farm-loan waiver to win elections
This, if applied judiciously and funded from monetisation of assets, can still be withstood by economy
But, if we go back to fiscal profligacy of past, it could affect long-term growth
While demonetisation and GST have helped expand tax base, tax revenue growth is not high enough to support fiscal profligacy
India has brought persistent double-digit inflation to a low single digit with huge effort of government and RBI
That can be lost in no time if there is fiscal profligacy
Private investment has remained subdued due to excess leverage of past
High real interest rates, limited transmission of credit due to PCA (Prompt Corrective Action) framework on state-run banks and tight
liquidity also weighed on private investment
Fiscal profligacy will crowd out private investment
At current level, it is pricing in a stable government
GST, RERA, insolvency process, digitisation of economy, financial inclusion through Jan Dhan accounts, a dramatic improvement in ease of
doing business ranking, reduction in leakages of subsides through direct benefit transfer and Aadhar linkages, and a massive build up in
infrastructure from roads to waterways have helped build a strong platform for economy to accelerate growth.
The US-China tariff war is a
In 1978, India was ahead of China in per-capita GDP
China has since become manufacturer of world
Due to tariff war, manufacturers are looking to shift base from China
If we can push large buyers of Chinese goods in US, then we can develop our manufacturing base
To achieve that, we need a stable government focussed on economic growth and not one fighting for survival.
The market will get impacted in
short term by many factors including global developments
However, in long-term, fundamentals will prevail
How economy grows and how companies increase profit will determine where our markets will reach
In a world where countries are fiercely competing with each other, it is extremely important to have a political leadership which is
While elections matter far more on result day and not much over tenure of government as fundamentals take over, it is critical to ensure
The market will be praying for both in days to come.
(The author is Managing Director, Kotak Mutual Fund.)
