The Sensex has seen a sharp rally to 50,000 and while some are raising concerns over valuation, there are others who feel that markets are discounting future earnings there is strong liquidity flow. Rashesh Shah, chairman, Edelweiss Group told Sandeep Singh that India is witnessing reversal of long, medium and short-term downcycles and equity markets are witnessing the same. Stating that India is at the same stage where it was in 2004, he said the government needs to spend over the next 12-18 months and ensure that the growth is inclusive and broad-based. Edited excerpts:
What factors justify this big surge in markets?
Strangely, India’s turnaround has been very sharp. Even though the government did not spend much money, it has bounced back very well. The rise has been all across with sectors such as auto, steel, cement, real estate among others bounding back. I did not expect this to happen so soon and thought that we were still a year away.
But what has changed significantly?
There were three downcycles — long-term, medium and short-term — playing out in India and all three downtrends are reversing at the same time. The long term downtrend started in 2012-13 and was on account of the scams, NPAs, overcapacity, taper-tantrum; the medium-term down trend was led by IL&FS crisis and impacted banks, NBFCs and corporates; and then there has been this short-term downtrend on account of Covid-19.
I think all three have played out and I am very convinced that while we did not see capex over the last 8-10 years, it will start now and people have started the investment cycle. So, all three downtrends are reversing at the same time and that is what we are seeing in the equity markets too.
So is the market rally justified at some level?
Market’s work is to discount future earnings. It discounts the long-term outlook which keeps on changing. I also see a big similarity between 2004 and now and I find India at the same point. We had tough years between 1996 and 2004, there were scams in the market, Asian financial crisis, economic sanctions because of the Pokhran blast, the tech bubble burst and then there was 9/11 attack in the US and governed change in India in 2004. So, we did not see any capex in those eight years, PSU bank NPAs rose up to 18 per cent between 2001 and 2003 and the SARFAESI law was then brought in to handle this.
There was also NBFC crisis in that period and real estate prices halved between 1998 and 2003. The RBI cut repo rates from 8 per cent to 4 per cent between 2002 and 2004, because the economy had slowed down considerably.
Even now we are seeing similar things. Now there is IBC equivalent to SARFAESI, we had NPA crisis, we saw real estate crash, repo rate cuts by RBI and no capex over the last 8-10 years. So in a sense, 2021 is like 2004. While things changed significantly for the next five years in 2004, I think that it will see a similar change now and with the change in US, the global trade will also pick up again.
So is this a big inflection point?
Yes. It is also because of the size of India’s economy now. India’s progress and growth is like gravity, you can only experience it but will never be able to explain it.
What do you think the FM can do to utilise the opportunity in the forthcoming Budget?
For one year, release the fiscal constraint and spend money as that will be the real fuel to the economy. Second is to incentivise investment by way of now taking care of dividend and capital gains tax. And third is privatisation and disinvestment. The government should embark on a 4-5 year plan for privatisation to raise Rs 10-15 lakh crore and should spend it.
I feel that by the end of 2021, investment will start.
What are the challenges to this opportunity?
The big challenge is to have a broad-based and inclusive recovery, otherwise it will not sustain. There has to be liquidity and credit availability for companies that are beyond AAA rated. While top guys have access to any amount of fund, if you go down, the liquidity is not there for them. So, one main piece will be credit growth. If it is between 5-8 per cent there will be inequality, but when it is 13-14 per cent then it is available to larger part of the economy.
The government needs to bring the confidence back. It has done GST and gone after tax evaders and now, for next 3-4 years there has to be lot of trust building and confidence boosting because India will be on growth path. You can’t keep cleaning all day.
Third piece is spending. I think for next 12-18 months, government needs to spend and it has got the liberty to spend due to Covid.
What is more important: monetary stimulus or fiscal?
While both should continue for the next 12-18 months, I think fiscal stimulus brings more equitable growth and so it is important. When RBI loosens the monetary policy, it always benefits the upper tier as the money goes to bank and from there it mostly goes to AAA rated entities. So, RBI loosening only favours the haves’ and not the have nots’. However, government spending actually helps middle and lower class. So, to address inequality, fiscal stimulus is more important.
I would say that the government should keep fiscal deficit concerns away for the short-term. At the same time, they must ensure that they are able to pull it back after 1-2 years. In 2009, they were not able to pull it back and it continued till 2012, resulting in huge spike in inflation.
Rashesh Shah (Source: Twitter/@rasheshshah) 
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