By: Anup Maheshwari
From being called one of the fragile five economies in 2013, India has improved its economic growth outlook in 2014 to emerge as one of the strongest economies amongst the emerging markets. The landslide majority for the BJP-led NDA in the May 2014 elections was welcomed enthusiastically by investors. Expectations are high that a strong government, not constrained by coalition politics, will usher in significant economic reforms that can accelerate growth in the medium term.
Inflation has been one of the key factors which impacted growth and consumption over the last three years. Although the decline in inflation in recent months could partly be attributed to the favourable base effect, the sharp fall (50 per cent fall since June 2014) in crude oil prices and the steps taken by the new government to contain inflation has certainly helped. I expect inflation to be stable over the next 6-12 months which will enable the Reserve Bank of India to cut interest rates starting 2015. Lower inflation will lead to higher disposable incomes, in turn spurring domestic consumption, which has always been a strong driver of economic growth.
On the policy front, recent announcements relating to sectors such as energy (diesel deregulation and gas price increase), construction (easing foreign direct investment in the sector) and coal (re-allocation of coal blocks) have been welcomed by investors. In the infrastructure and mining sectors, the government has proposed various changes to accelerate the investment cycle. The road and transport ministry has already started approving various stalled projects.
Although the new government has taken some decisive steps in its first six months after assuming office, there are some areas where legislative reforms will be required. These reforms will need the support of the Rajya Sabha, where the government does not have a majority.
However, showing their commitment to implement tough reforms with or without the support of the opposition, the government took the ordinance route for raising the cap on FDI in insurance from 26 per cent to 49 per cent, easing the land acquisition act and re-promulgation of coal block allocation after failing to pass these bills in the Rajya Sabha, in the recently concluded winter session.
The much awaited GST Bill was approved by the Cabinet and made its debut in the Lok Sabha and will be taken up for further discussion in the Budget Session of Parliament in February.
After touching a low in the first three months of calendar 2013, the GDP has improved over the last two quarters led by better growth in the industrial sector and agriculture sector. Also, steps taken by the new government bodes well for a revival of the investment cycle. The “Make In India” campaign and focus of the government on “ease of doing business” will help in improving the investment climate in the country and attract more investments from domestic and international firms. This will also ensure that the share of manufacturing in India’s GDP improves from the current 15 per cent. Some estimates suggest that once fully implemented nationwide, GST has the potential to add around 100-150 bps to GDP by FY2018-2019 (assuming it gets implemented in 2016).
I am optimistic about domestic inflows into equities in 2015. The last 4-5 years witnessed extremely large outflows from the equity markets by domestic investors into other asset classes like real estate, gold and tax free bonds. However, we have seen a significant change in the political and economic environment over the last 12 months. I do not expect real estate and gold to do as well going forward. In the last bull cycle between 2004-2007, domestic equity inflows per year were around 0.5 per cent to 1 per cent of the market capitalisation.
The recent actions by the government indicate their commitment to revive economic growth and contain inflation. Greater clarity on land acquisition and labour laws along with the successful implementation of GST may instill confidence and attract investments from foreign and domestic investors. Indian investors should watch for direction from key developments like the US Federal Reserve policy, Union Budget, earningsin the third quarter of financial year 2014-15 and the RBI’s action on interest rates in 2015.
Further improvement in the US economy may force the Fed to increase interest rates later this year which may impact global liquidity, and emerging market currencies in particular. India will be no exception to this trade. However, we believe that the RBI is better prepared this time and the impact may not be as severe as seen before.
I will not be surprised to see domestic inflows of about $10-15 billion dollars into equities. The relative returns from equities are likely to be better than other asset classes in 2015.
We strongly believe that the Indian economy is on the cusp of a strong growth uptrend that could herald 6-7 per cent GDP growth per annum over the next 5-10 years.
This will contribute to robust growth in corporate earnings (we expect earnings growth to be around 15-20 per cent per annum over the next three years) and underpin strong performance of Indian equities.
A pick up in corporate earnings growth, fall in interest rates and expanding return on equity will be the key drivers in the medium- to long term.
The author is Head, Equities and Corporate Strategy, DSP BlackRock Investment Managers Pvt Ltd