India
is going through a critical phase of growth amid chaos. What was once a
promising and rising economy had somewhat lost its sheen midway.
Suddenly, everything was looking gloomy a few months back. There were
concerns about growth slowdown, high inflation, policy paralysis,
corruption allegations, weak investor sentiments, high current account
deficit, and the list went on. To sum up, high growth, which was taken
for granted, was not automatically achievable. Standard & Poor’s
(S&P) and Moody’s had warned about rating downgrades.
In
the midst of this, in September, the government swung into action and
what followed seemed like a giant waking up from slumber. Announcements
like the diesel price hike, the capping of subsidy on LPG (liquefied
petroleum gas) cylinders, foreign direct investment (FDI) in retail,
aviation, among many other things, restored the growth agenda of the
government. It also kicked off an ambitious public sector unit
divestment programme. The Sensex, Nifty and other key barometers of the
financial markets reacted positively to the reform initiatives of the
government.
However,
there is a long way to go to ensure sustainable growth. Inflation is
high but is coming down. GDP growth for the first half was at 5.4%.
S&P still sees a chance of a rating downgrade. Revival of capex
investment will be the key for the virtuous cycle to begin.
My
personal view is that some actions are required by the government to
revive economic and investor sentiment. Among the first is the need to
finish the tax reforms, which include the much-awaited goods and
services tax (GST), as I believe it will ease movement of goods. It will
also add to GDP growth and to the taxes in the medium term. Second, the
government should ensure long-term availability of fuel for power
sector as the cost of non-availability is very high. Third, the
government needs to adopt a credible fiscal consolidation plan by
reducing wasteful expenditure and capping subsidies. We hope that the
cash transfer for subsidies will bring considerable savings to
government as well as increase effectiveness by preventing leakages.
Fourth, there is an urgent need to kick-start investment activities to
build capacity, especially in the crucial infrastructure sectors, which
will reduce import dependence. Last but not the least, there is a need
for increased governance to tackle corruption to ensure strict law
enforcement and its adherence.
Going
forward, inflation is expected to fall, which will clear the path for
RBI (Reserve Bank of India) to cut rates. Also, I believe growth has
bottomed out and will recover in the next few quarters to above 6%.
The
recent government actions will provide much-needed support to these
sentiments. This will also provide some relief to the corporate sector
as many companies are reeling under stress. In this backdrop, we expect
domestic financial markets to perform well in 2013. The interest rates
on government securities and corporate bonds will fall, which will
result in a rise in bond prices. Also, equity market valuations looks
reasonable at 14 times price to earnings. We expect equity markets to
provide decent returns.
Amit gupata
PGDM 2sem
