If outcome of the general elections 2019 remains the biggest uncertainty for the markets, Rashesh Shah, chairman and CEO, Edelweiss Group told The Indian Express that the market is already preparing for it. Stating that the fundamentals look set for strong growth in 2019, he said that markets will not be too stressed if there is a coalition government as structural policy decisions that have been taken will continue. Pointing that there is a sense within the government that agri, small business and urban poor have not done well over the last four years Shah said that he expects some announcement on the farm sector soon. Excerpts:
Now that the five year term of the current government is coming to an end, how do you assess it?
I think overall a lot of work has been done such as GST, IBC and RERA among others. Foundation has been laid and good policies have been put in place whose impact will come in three-five years. However, the two areas that it slipped on were agricultural distress and private sector investments. Low food prices for a long period of time coupled with demonetisation put a lot of pressure on agri economy and its revival remains an urgent requirement.
On investments, I would say that the interest rates stayed too high and liquidity remained restrictive for too long. I think we have one of the highest real interest rates in the world. However, I remain optimistic and I think the economy is a coming back and all things are falling in place and 2019 should be a good year.
What gives you that optimism?
Capital investments have started, capacity utilisations are crossing 75 per cent in several sectors. Bank credit growth has picked up even as it slowed down for NBFCs (non-banking financial companies). While the combined credit growth of banks and NBFCs over the last five years was 12 per cent, I think it will average 14-15 per cent for the next two years. Oil prices are lower and inflation remains low. If US economy slows, it is good for us because if US economy is under pressure, oil prices come down and interest rates come down. India imports only two things — capital and oil. So when there is some pressure in global economy, it results in lower oil price and lower interest cost and that is good for India.
As of now the liquidity remains tight and interest rates are high and this does not augur well for investment revival. However, as it improves over the next few months, the economy will take off. Also, once the election uncertainty is out of the way, it will help lift sentiments.
What if a coalition government comes to power at the Centre?
The questions is whether the market is prepared and fortunately, the uncertainty over election outcome has started to filter in now. Unlike in 2004 when it was almost certain that NDA will come back (and when it did not happen, there was a shock), this time around there is an uncertainty and recent state election results have only added to it and so investors and markets are in the process of getting prepared.
However, even if there is a coalition government, markets will adjust to that because structural policy decisions that have been taken will continue. If you look at the economy and markets, they generally have their own cadence. Political events create a short term upheaval but in the long term, the markets march to their own cadence.
So, markets won’t be too stressed if there is a coalition government. The fact is that India has continued to grow over the last 25 years. The good thing is that while the 25 year CAGR of India is seven per cent, even the 20, ten year and five year CAGR is seven and so the seven per cent growth will be there.
With investments coming in and consumption and household savings good, the seven per cent growth is not at risk even in coalition govt. Ideally we need nine-ten per cent but even with seven per cent we have done well. Things are happening but not to the extent required.
What are the concern areas for the government?
I feel the government has realised that two-three groups have not done well over the last four years. One is the rural/agri, the second is the small businesses that have struggled because of demonetisation and GST and the third is the urban poor.
However, now there is a clear sense and acute understanding that they have to do something. Ideally, two years ago, something should have been done for agriculture sector, but the issue became really important only after Gujarat election results. The recent election results have made the issue even more important.
They have been looking for answers even from industry chambers as they have many companies that work in rural areas and so they wanted to know what can be done pre and post harvest. I think some announcement on farm sector will definitely come in the near future.
How do you see the NBFC liquidity crisis?
The liquidity problem stated even before IL&FS issue. When demonetisation happened then a huge amount fo liquidity came into the system and that liquidity went out slowly as people took back the cash. Also, FIIs sold a lot from both from equity and debt markets last year. The IL&FS issue on top of these two acted as a spark in a fairly combustible environment.
In the hindsight, I am partly happy that it happened as it was a good stress test for the industry and the NBFCs came out very well. There were some concerns on ALM mismatch but that was not a big issue. The industry in the long term will become stronger. Earlier, they were focussed only on growth and profits but now people are starting to ask questions on asset liability management and that is a good development.
Also, some rebalance was required. Over the last four years it was all NBFCs and no banks but now some growth has switched back to banks.
Ideally NBFCs and banks are complementary to each other, but since 2014-15, only NBFC’s were growing as banks had their own issues on NPA etc. Now that balancing has also happened. If this would’ve happened a year later, it would have been much tighter and harder to handle. It was a much needed speed breaker and people slowed down, looked into their businesses, processes and now the road will open up and growth will come back.
Are you happy with how RBI handled the issue?
I think the RBI should have done more on liquidity and commentary. They should have calmed the market by saying that we are there, which they are doing now. When the panic sets in, it is important for RBI to come and say that we will not let anything go wrong.
NBFCs have become a very important part of the system and now 20 per cent of the credit economy and they will grow.
How do you see market movement from here?
Until the elections there will be some sort of cap on markets because the uncertainty is for real. But, the underlying economy is doing well and if oil prices remain low, RBI cuts interest rates and infuses more liquidity then the second half of the year will be very good.