Investors should know whats really happening with the Indian economy

Investors should know whats really happening with the Indian economy

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As an investor my interests lie in understanding the real impact of this current economic slow down in the Indian economy so as to to manage my portfolio in a rational manner without being influenced by the politically driven headlines.

The GST reform is a sort of India’s Eurozone formation. In fact even better because we already have a political union, single currency and a fiscal unification.

India has for long suffered fractured logistical flows which made importing easier than transporting. This also seriously impacted the spread of development in our country as a result of which, most economic activity remained within the vicinity of western port towns, especially Mumbai. GST will enable the spread of industry across the geography eventually resulting in dispersed urbanization which is so critical for our people’s well being. This could well be the only way to save our old cities like Mumbai, New Delhi, etc from sinking into a state of utter chaos whilst they creak under the pressures of ever increasing population.

Structural reforms, even in corporates, are a thankless task which could many times cost the CEO his job but, in a country as complex as ours it is all the more so. The results of any structural change are slow to come by and can only be undertaken by a political leader who is willing to put his electoral prospects at severe risk. It is therefore, hardly any surprise that, it has taken India decades of procrastination before someone had the political courage to bell this fat cat.

That the recent slowdown can be partly blamed on demonetization only shows us how deeply our economy is entrenched in black money. India has only a shameful 1% of its population paying income tax. These large currency notes went up from a mere 15% to 85% of total money in circulation. Moreover, the RBI has in a report claimed about 50% of these notes once issued disappeared out of circulation. If there is one thing demonetization has achieved, its giving every Re 500 and Re 1,000 currency note an address in a bank account. It is estimated that, a lot of this will surface as unaccounted money in the coming years which is when Jaitley may have the last laugh at the cost of his opponents.

Anything attempted will be opposed; whether it is registering PAN, linking to Aadhaar, etc. In the developed countries, tax payments are so high not because their people are far more honest than us but only because their records are so well linked that, it is almost impossible for anyone to cheat on their taxes. Those decrying measures attempted to curtail the black money menace should sit back and ask themselves if we want our future generations to inherit a bankrupt economy; devoid of infrastructure and social benefits (which will become increasingly critical going forward as we enter the era of robotics and AI).

Knowing his political acumen it is not possible that, Modi did not expect his opposition (which seems more vicious from within his own party than outside) to capitalize on this window to get back at him. I am sure he has a couple of political cards up his sleeve to offset whatever political negativity he may suffer as a result of this difficult phase in the economy.

Therefore, here’s how the Indian economy looks to me;

  • The high growth during the previous regime was mainly due to the global liquidity sloshing around and high credit which resulted in huge capacities built by industries especially steel, cement, etc. These are the ones which have resulted in NPAs today, which the Modi government is left to tackle.
  • There can be little private investment without the NPAs being resolved as no one can afford more debt and before the industry has grown out of its over capacities. No amount of interest reductions will achieve this. Only time will heal.
  • One of the factors which have gone in favor of the Indian economy has been its fiscal discipline. It was way back in 2008 that, a fiscal deficit of 3% was to be achieved but for lack of courage we let fiscal profligacy takeover. Although many believe that, this began as a measure to revive the economy following the Lehman Crisis, it actually started earlier in 2007. What followed was an extraordinary run up in inflation, negative real growth, negative real interest rates, bank credit driven capacity expansion and exorbitant real asset valuations.
  • Jaitley accepted 3.0% as the target for 2018 but eventually settled for 3.2%. Its hardly surprising that, the opposition found an opportunity to push Jaitley into excessive spending and take away what I believe is one of his significant achievements. Inflation has been down but I would believe a lot of it is due to the fall in oil prices. Thankfully, this Government has taken good advice and not gone off on a spending spree. (Hopefully stays so)
  • Further, the opposition has been quick to capitalize on the people’s weakness for instant gratification; especially acute in a country where the vast majority is anyway facing day to day economic survival challenges. However, the real question to ask is of course; how real is the projected down turn in the Indian economy? True the GDP is down to 5.7% (against 6%)  but then, why are the published manufacturing imports making the CAD go up from 0.6 to 2.6% of GDP? I guess the bounce back is in progress!
  • Firstly the benefit of oil price declines has gone away and this has had a double whammy effect. How? the benefits which resulted in a higher GDP last year (7.9%) resulted in a high base on the one hand and of course the growth stimulus (from declining oil prices) does not exist this year. Secondly, the switchover to GST naturally resulted in a de-stocking of old inventory and a delay in buying afresh.
  • No one ever expected that, the transition to GST would be smooth. Should we have therefore, deferred its implementation till some utopian state of perfection was achieved? I remember Jaitley saying (rightly so) “An imperfect GST is better than no GST”. Most of us who have managed even small system changes will agree that, there will always be glitches and in structural changes as huge as the GST there may be a couple of big ones too! What is important is to quickly learn the lessons and settle the system down. I have no doubt this will happen and the GST will eventually be hailed as one of the most productive structural economic reforms ever undertaken by India.
  • India has forever been plagued by tax compliance and associated corruption issues. An automated GST is expected to resolve some if not all of them. Once it is linked back to the more robust IT systems, we will hopefully, see higher tax recovery both in direct and indirect taxes.
  • Another factor being thrown up in the media is lack of employment – well its not bad when we compare it with the record of previous governments. The fact remains that, the entire world is facing the challenge of a “jobless recovery” for reasons like Chinese exports and technology revolution. Exports are being challenged by new trade barriers. The trade situation today is substantially different from what it was in the decade post 2004. Of course, that is not to say the political opposition should not use it as a stick to beat Modi with, just as he would have in their place. Nevertheless, that, the validity of our demographic dividend is challenged remains my single most long term economic concern for India today and I don’t believe anyone (Modi or otherwise) has a quick fix for this.

As for the stock markets; they have been in self denial for a long time.

The FIIs which have bought into it, disregarding flat growth in corporate earnings on the back of cheap money they have easy access to; were always expected to recalibrate their emerging market portfolios when the Fed announced the withdrawal of liquidity (shrinking its balance sheet by selling the bonds it holds) in an attempt to correct their risk-reward ratios.

As expected the FIIs have been selling off Indian equity to move their money out or into Indian debt.

Domestic investors who have characteristically rushed into Indian equity mutual funds when its already over bought,will slow down as the sentiment turns cautious; in which case the capacity of DIIs to offset FII outflows may become limited in days to come. If one was to be realistic, our stock markets could be expected to adjust their levels (downwards) to corporate earnings recovery.

Every political party in power, in countries where a GST equivalent regime was implemented has not been re-elected and its electoral loss has been attributed either to an economic slowdown and/or the initiation setbacks in its GST administration.

If one was to go by what most working, professional and apolitical economists say, the Indian economy is not in a cyclical downturn and the current slowdown is only a temporary setback.

They expect the economy to bounce back in 2018.

What the market has seen today is in my view bouts of normal volatility and not a correction (which experts believe happens with at least 20% decline).

Well one needs to keenly look out for genuine “green shoots of economic recovery”.

Going forward, I believe market levels will eventually have to recalibrate themselves (downwards) to reflect insipid corporate earnings (which have been near flat for the past two years) and when a correction happens it should be seen as a “buying opportunity” – so make sure you have adequate cash for this.

I have no doubt that, the Indian economy remains one of the fastest growing economies in the world and its longer term story stays firmly intact.

Well if the Indian economy were to actually recover in 2018, it will be most timely for Modi who could well escape any electoral punishment in 2019, for doing the right thing by our country in taking difficult decisions despite personal electoral interests.

I have no doubt that, there is no turning back from GST for Modi or for that matter his successors – they will have no choice but to sort out the glitches and get it working like a well oiled machine. India will hugely benefit from GST in the longer run because India will become a “single market” in the true sense.

Hopefully the message doing the rounds on Whatsapp ( We want Modi to deliver everything and if not, we will vote for someone who did nothing ) will not prove to be prophetic.


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4 Replies to “Investors should know whats really happening with the Indian economy”

  1. Very well analysed write-up.Most of the columnists,journalists&commentators are all finance ministers of this country.Everyone has a solution.

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