Unlocking the growth map for India- What lies ahead ?

India faced an archaic type of government for a decade which systematically broke the backbone of Indians. Scams aggregating to millions of dollars left the state ex-chequer with a deep wound and undoubtedly pushed the development of our country several years or may be even decades back. Given the effect of time, inflation is bound to be factored in the price of every product and/or service. But a simple understanding of economics can make this thought clear in mind that if we did not have politicians and bureaucrats at different level of system, that amassed wealth at the speed a normal human breathes, India would not be facing such steep inflation figure, years of CAD, and weak consumer and business sentiments. 2G, Coal-Gate, CWG and many other scams which could have added funds to the nations account and eased the pressure of cross country payments as well as huge burden of domestic subsidy.

The UPA government subsidised rates on various utilities raising the debt burden of the country, which in actual terms is debt to every citizen to be repaid by additional direct and indirect taxes. The predecessors of Modi government had budgeted a whooping Rs.2.5 trillion (US$ 41 billion) on fuel, food and fertilizer subsidies for the fiscal April 2014 to March 2015. That’s almost 2.5% of GDP and 15% of total expenditure for the year. To put it in a nutshell, if a particular family gets all household utilities on leverage, the cycle has to stop somewhere. The suppliers will downgrade the credit rating of this particular borrower, the risk which India faced in late 2012 and early 2013 due to lack of reforms. One decade of chronic speed of development has made most of us so averse to taking leaps in taking the country forward. The country which jumped to a growth rate of 8.5% and a favourable CAD of 2.3% lost the focus when the power at the centre changed.

Domestic and foreign investors were averse to doing business in India as well as from entering Indian capital markets, due to lack of reforms which could come in near future. Amidst all these trivial issues, hopes started rising as Mr Narendra Modi was declared as the prime ministerial candidate. The news resulted in positive business sentiments not only in India but across the world and it started foreseeing reforms in India, and investment soared up immediately. Modi’s manifesto and speeches promised not only various upliftment policies of the poorer and weaker sections of the society but also focused on development in infrastructure and manufacturing sector. Although ,there is an empty chair of opposition and once in a while roaring Gandhi scion doesn’t seem to build strong counter arguments in parliament, NDA needs to work really hard to deliver what they promised.
 
Modi is less of a politician who will stick to the textbook shots and possesses thinking of more of a businessman who makes decisions and ensures execution of the same. BJP opposed FDI in multi retail which was proposed by the preceding ruling party but approved FDI in Defence and Railways. This is a classic example of a businessman who raises assets on leverage. Developmental and infrastructure projects will create job opportunities in domestic markets and increase the output of the country (Expected Unemployment for this year is 3.8% according to Global Employment Trends 2014). This will be done with foreign investment which will have systematic withdrawal plans. So when the investors pull out their money, we will be left out with infrastructure which will be of huge benefit to the people unlike FDI in multi retail which would drain the disposable income of Indians and take the invested amount as well as profits back home.
 
Indian markets are one of the favourite Asian markets which are in a bull period. Stock market reached record fresh highs on many occasions during pre and post-election result days. Almost 200 scripts were trading at 52 week highs on election results day i.e. 16th May 2014 on mere sentiments and speculation. Oil, Infra and banking sector stocks like Reliance industries, Adani Power, ONGC, Indian Oil Corporation, HDFC Bank, ICICI Bank were some of the heavy weights. PM’s “100 Days” agenda and independence day speech made the markets touch fresh lifetime highs on next trading day. Oil, auto and infrastructure sectors are the areas which will remain at higher levels due to policy reforms. 70% of the mid-cap and small-cap stocks which gave return as high as 75% to 200% between April to June period have fallen drastically and reached lower circuits in many day trades due to lower top and bottom line figures. Sales revenue of companies like NEPC India, Texmaco Rail, Quintegra Solutions, NIIT, etc were half in quarter ending June when compared to the same period a year ago. Traders had become active in fundamentally weak companies to take undue advantage of the positive sentiment all around Asia Pacific region.
 
Considering oil and fuel segment, petrol price reduced twice in a span of just 15days after a price cut in Mid-April 2014. Every US$ 1 decrease in crude oil price reduces around Rs.6000 Cr. Of India’s import bill. Crude oil was trading at US$ 112-113 on 10th July 2014, the day budget was announced which is US$ 10 higher from the current levels. International Crude oil prices of Indian basket went down to US$ 102.58 on 12th July 2014. If prices remain at US$ 103 levels, then it can reduce India’s oil import cost by Rs.60000 Cr. which is equivalent to budget of a bullet train. Oil Marketing Companies (OMCs) are now almost market driven company with book values of close to 3 compared to global players with book values of close to 5.5. Retail inflation was at two month high of 7.96% due to soaring vegetable and fruit prices factoring in weaker monsoon this year. This has eased with wholesale price index coming to a five month low at 5.19% and economists believe annual WPI will be around 5.10%.
 
While some stimulus needs to be to injected for economic growth to gain some momentum , economists don’t expect RBI to cut rates until 3rd quarter of next year as it has target of bringing down retail inflation down to 6% by start of 2016. So, RBI governor has to walk on a tight rope as he cannot reduce rates as core headline inflation figures are not getting any softer on the nation. Also any rate hike will dampen the growth prospect which seems to enter into a new dawn now after several months of negative and marginal growth numbers.
Indian markets will be tested for its new resistance levels when the global interest rates rise and investments are pulled back. Also, the scenario worth waiting for is impact of PM Modi’s visit to USA in September and after talks between Indo-Pak foreign secretaries scheduled on August 25th have been called off. The most promising announcement seems to be of massive financial inclusion that the government is aiming for. It’s still a question whether dissolving Planning Commission and bringing in a new parallel structure will benefit the nation or otherwise. It’s only in hopes and in hindsight that people of India will know whether the new government, new PM and the market delivers and how.
 
About the Author:
Ronak Shah
He has completed PGDM (Financial Services) from K.J.Somaiya Institute of Management Studies & Research (2012-14) and is presently working as an Equity Research Analyst with Transparent Value.

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Unlocking the growth map for India- What lies ahead ?

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