Despair may have given way to tentative optimism,but it is too early to call for the bubbly and light the crackers.The Economic Times special round table convened on October 4 to discuss a way out of India's economic malaise delivered a blunt message to investors,the government and India Inc.We are living beyond our means and our companies have borrowed recklessly.We must cut back and make a painful adjustment that could last some years.There is very little cheer for investors in the short term but good news for the government and the Reserve Bank fighting to stave off a currency collapse.The worst of the currency crisis is probably over and tapering may not have much impact on flows.But food inflation will remain high and corporate balance sheets are likely to get devastated by a slowing economy and interest rate hikes.A struggling Congress party could take some heart from the remarkable rural transformation in many parts of the country and the BJP may well be in danger of peaking too soon.A warning to investors: Avoid banks and smokestacks and put your faith in technology stocks.Consumer stocks may be heading into trouble.Refurbish your stock-picking skills and that's probably the way to play the market right now
Just after the September 18 Fed meet,Marc Faber said we are in an unending QE (quantitative easing).What the Fed has done,he said,is raise the diving board,so you have a bigger fall.What do you think will really happen now Are we in an unlimited QE ?
Ridham Desai Our view is QE will start later this year,though leadership transition at the Fed does pose some question marks on the timing.I think what the Fed has communicated is that it is heavily data-dependent.So its not going to pre-empt data,neither on inflation nor on labour stats.And,therefore,it will respond with a bit of a lag,so it will see how the data comes and then respond.I think the US will move away from QE for next several months because we do think that the US economy is recovering,and the most notable feature of this recovery is capex,which seems to be coming back.We call it the US manufacturing renaissance,and the few years of depreciating dollar has made the US economy far more competitive than before.
Inflation does not seem to be coming down.What did we do wrong Did we try and lower rates when we shouldnt have?
Ritika Mankar Mukherjee Lets take it from two aspects.The first is that the seeds were sown immediately after the Lehman crisis.We could clearly see the economy was recovering,but we kept our fiscal and monetary stimulus in place and it sort of turbo-charged the economy and we couldnt check it later when we wanted to.So thats one aspect of the problem.The other more interesting aspect,and something not many people have focussed on,is that a large part of the inflation is driven by rising rural wages.Now many people say that has happened because food inflation is rising,but the more interesting question is how do they have the bargaining power for wages when the economy is slowing down I think a bit of travelling to UP (Uttar Pradesh),Bihar as well as Maharashtra has helped me understand there is something quite unique happening in the rural areas.There is clear reverse migration wave to the extent that neighbouring states such as Maharashtra,Karnataka are complaining of shortage of labour and that is because more and more people are going back to the erstwhile labour supply states such as Bihar and UP.So thats one dynamic.If you speak to say a cement dealer in Bihar or somebody who looks after large corporate farms in UP,you will get to know that there is a meaningful labour shortage because of reverse migration and the reason for that is more and more people are wanting to get into the education system.The second layer of inflation is coming from the fact that demand is being driven by a lot of money the government has pumped in and which,perhaps,explains the resilience youve seen.
Neelkanth,you guys did an extensive report on rural India whats your feedback ?
Neelkanth Mishra Let me address some of these issues,and let me apologise if I openly contradict the views on this table.I dont think its MSP (minimum support price),I dont think its NREGA (National Rural Employment Guarantee Scheme).If you look at MSP,agri is 13%-14 % of GDP.MSPs effect is about 30%-35 % of that.People ignore the fact that milk,fruits and vegetables are now as big as cereals.There are large parts of agri GDP that are completely unaffected by the MSP.If you are talking about 5.5% of GDP,I think thats way too small even if the MSP was the driving force.In MSPs,you have to be very clear about what are the causes and what are the effects.If you look at farmer profitability,it has not gone up much.It is because of the cost curve.There I would agree with Ritika that the underlying inflation in any economy is wage inflation.Because that is at the root cause of anything you make.The question is: why is the rural wage inflation rising at 15% in July The answer is what we call the silent transformation.For two-and-a-half years,we have been consistently writing that India is going through a change that it has not seen since independence.We are forming larger economic clusters.It is unfortunately not education.It is the fact that there is massive job creation happening in areas which we somehow seem to ignore.If you look at the 2012 employment survey,only 18% of Indias workforce is salaried and has regular wages,30% is casual and 52% is self-employed.In the 2005 economic census,India had 42-million enterprises,with an average employee strength of 2.4.According to the Economic Census 2005,every retail store creates 1.7 jobs.You go to any village now,there are 4-5 grocery stores.If you take the five-million new stores opened in the last five years,that adds up to 8.5-million new jobs.If you look at construction in rural areas in the census data,it clearly states that the growth in houses with cemented walls was 8% CAGR in 2001-2011.Think about the growth in brick kilns,which are never tracked.We actually went and asked many state governments how many brick kilns do you have.They had no idea.Agriculture gives you employment for four months in a year if you have two harvests.If you can work at a brick kiln for two extra months,thats a 50% increase in your income.If you can work on a construction site for a big house,given that so many houses are semi-pucca and kutcha,and with people adding rooms,replacing walls with brick walls,adding a roof or floor theres immense opportunity in the construction sector.Thats job creation.If you think of the need for carpentry for furniture need for basic things and what we have stated very clearly is that the GDP growth is being underreported.I think the GDP growth has been underreported to the extent of 1.5%-2 % in the past two years.This means that we are not really stagflating.Look at poultry farming.We believe poultry farming has created more jobs than NREGA.Why was poultry farming not happening earlier It has high RoI,its the cheapest form of meat,a lot of people get jobs,but why was it not
happening Because there were no rural roads,there were no cellphones.The rural network,in a village thats an isolated entity,you cannot have a poultry farm.But the moment you connect 50-100 villages,there can be so many people doing poultry farming.And all the people in those villages will get cheap meat.This form of job creation is happening all over India,especially in Bihar,UP,MP (Madhya Pradesh),Chhattisgarh areas which did not have good rural connectivity.
We have had a very good monsoon.Will it help reduce prices ?
NM The monsoon hasnt been that good.It was great in terms of distribution and precipitation till the middle of August.Then there was a large lull for five weeks.If you look at the acreage,it has been up 5% year on year,but it was up 9% on August 15,it has slipped a bit.If you look at the reservoir levels,if you plot what the water levels were in 2011-12,we are almost there.This is where the media and we all get influenced by what we hear in the media.And I think corporates do the same.Some of the corporates,I think their internal study is what gets printed in the pink papers.People think a good monsoon will bring down inflation.But if you look at where food inflation is coming from,it is coming from fruits and vegetables.Cereals are a small part of it.Milk is a small part as well.Meat,fruits and vegetables are 60%-61 % of inflation,that is not going to come down with a good monsoon.In fact,rice and wheat,the more we produce the more we export.The acreage increase has been most dramatic for oil seeds and pulses,where our import bill was rising.We will see a fall in import of oil seeds and pulses.It will affect the trade deficit,but I dont think it will affect growth by itself.Ground water replenishment is something that should help us out,but thats never measured.But that should help us for future crops.And Bihar and Jharkhand have had a drought.I think food inflation is so high because a lot of manual labour is involved.Its very hard to have machines pick out okra or brinjals or cauliflower,so you need manual labour.Labour is a much larger part of the cost and less possible to scale as well.So this is why food inflation would remain high.
Is the government really tackling the structural issues How confident are you about it meeting the 4.8% fiscal deficit target?
Manishi Raychaudhuri It is politically very difficult to tackle structural issues.Many countries with high CAD (current account deficit) have similar kind of political situations.India and Indonesia will face general elections next year and so will Brazil.Under these circumstances,it is very difficult to imagine how structural problems created over the last seven or eight years can be tackled.But to get the economy out of this spiral,we have to do a painful adjustment.
Neelkanth,you have written extensively on CAD and were probably one of the first few to say the issue has been caused more by corporate debt than institutional outflows.Assuming we enter some tapering next year,what are the things you think the government should do to be prepared ?
NM There is nothing the government can do to encourage flows over 3-6 months... I dont think we should fear the tapering too much.If you look at the foreign ownership of Indian bonds among all emerging markets,we are less than 5%.In some emerging markets,the figure is 25% to 30% to 40%.In fact,foreign ownership is going up in Brazil.What I think the Fed really wanted to do,which they cannot put on paper,is that they could see there is an emerging market credit bubble emerging.They wanted to deflate that.Thats not our official stance,thats not what the Fed has stated,but I think the risk of that bubble,when it got burst,eventually hurting the US economy was rising.Given that we are living in a world that is much more integrated financially and through trade,they need to be cognizant of that.So by doing what they did,by doing the complicated posturing that they did,I think what they have managed to ensure is that the emerging market credit bubble is deflated.You cannot keep assuming the yield on some of the EM sovereign will be 2%-2.5%.I wont be too worried about capital outflows.Because even when US bonds were 4% or higher,India was still seeing inflows.In the last 15 years,Indias share of the emerging market equity inflows has been 20%;this is not a very near-term occurrence.There is a structural aspect to inflows in India.It is almost like an SIP.You and I,for our savings,would say this is the money I would like to put in stocks,bonds,etc.If you have a large sovereign wealth fund,they will get say $30 billion a year,they will allocate x amount of money.It is very easy arithmetic.$7-8 billion of equity flows should keep coming to India every year and this is not linked to the taper at all.Unlike during the 1991 crisis,the 1998 crisis,the 2001,2008,and 2011 crises,the Indian economy now is not strong.So the imports are naturally slowing down.Which means the amount of capital we need to fund our CAD,FDI and NRI deposit can suffice for that.We dont really need to get any more inflows.I think the market will get jitters.We have to be cognizant of the fact that we cannot stand in front of the mob.But I think that six months after the tapering,you will realise it didnt matter at all.
What sectors seem important to you now from an investor perspective ?
Jyotivardan Jaipuria We are overweight on IT and pharma,which is the consensus today.We are overweight on auto and telecom as well.We are underweight on consumer staples.The sectors which get a lot of attention are auto and telecom.
Has the two-wheeler segment bottomed out The numbers seem better than before.
JJ You have to be careful about sales during Diwali (read festival) season.What you get is the manufacturer sales,not the retail sales.You dump a lot of inventory in the system and,hopefully,sales will pick up.And quite often,you find sales do not pick up.Consequently,the next two months sales come down.You also try and figure out what happens in the retail sales.Sales are okay.There is nothing extraordinary.What you have to also think is the margin because twowheelers have a lot of competition.
What is your outlook on the bigger car companies ?
JJ In car companies,you will see bigger competition compared with the two-wheeler segment.Two people in the industry can lead to a lot of intensity.A lot of players who wanted to come in have arrived in the car industry.But,demand growth has been very slow due to the economy.People are buying more cars.Roads are getting better;they have improved.This is the industry which will probably do well over five years.
So will these stocks do well ?
JJ Just because an industry is doing well does not necessarily mean all stock investors will make money out of the industry.Industry may have done well but some players have not.
Do you think,auto companies reached a level where competitive intensity has increased ?
JJ In the next five years,people will be making money.Demand is very low now.Hopefully,it will pick up.
Banking,one of the most volatile sectors this year What is your view on banks ?
RD I think the macro pain for the next 18 months will largely be borne by banks.If growth slows down,the NPLs (non-performing loans) hit them.I think at various points in time,the market is gripped with this uncertainty : how big is the NPL problem going to be Are we going to see more write-offs.The other problem is banks balance sheets are highly illiquid now,because credit growth has been persistently higher than deposit growth.You cant get a new credit cycle,so deposit growth has to exceed credit growth for a measurable time frame so a new credit cycle emerges.There is a growth problem also.So we have not taken any active call on the sector.We are underweight on banks,to that extent we are overweight on technology and autos.But we are mostly focussed on picking the right stocks in the sectors.So within banks,we can find a couple of banks that make money for investors.Likewise in pharmaceuticals,consumers.We are not too bullish on consumers.Imagine if India has to lift its savings rate to bring its CAD down,consumption will take a hit.And the prices which they are trading at are not compelling for me to go through that cyclical pain.Investors have to make individual stock choices.I think there is pain in private sector banks,because it has to do with NPLs.The private sector banks have also made loans to infrastructure companies,they are not secluded from the problems.The problems are bigger for the PSU banks.I dont think there is a necessity for investors to get involved in this sector,where there is so much uncertainty.There are one or two banks that look okay.Otherwise avoid the sector.
Sectors such as capital goods,infrastructure and heavy engineering are seeing a dramatic slowdown.Investor attention is focussed on a few sectors like IT,pharma,consumer goods and large-caps.Do you think given the high multiples,investors should go for these stocks ?
MR You know one would be tempted to venture into these high-beta sectoral stocks.But every time one has done that in the past,he would have been slapped in the face by the market.Many of these stocks have not performed despite the tempting valuations.Actually,in India,efficiency of capital investment is declining.To generate one unit of GDP growth,you need to invest four units of capital,but in todays situation,you need to invest eight units of capital.That is the reason why the compulsion to invest is declining rapidly.When it comes to allocations,FIIs want to invest in the benchmark rate of India,which is about 8% and about 6% in Japan or Asia.And because of which,you are tempted to invest in sectors that are relatively safe.That is exactly the way FIIs have been investing in India over the past one-anda-half years.There are 20 to 25 stocks that have attracted 75%-80 % of the FII money.And if you see the revenue growth of these companies over four to five years,it has been in the range of 15%-20 %.It appears these companies are completely economy-proof.I would too hang my hat on IT exporters,pharmaceuticals and some of the merchandise exporters who exist in the auto universe.I am personally apprehensive on the consumer staple sectors as the potential pressure on earnings estimate has been completely ignored.
Ridham,you have said the consensus opinion on recent state and national elections has always been wrong and that the turnout has been high and the mandate has been decisive in favour of one party.Do you expect something similar in 2014 as well ?
RD A lot of changes have happened,there are 140-million new voters that could have got registered hopefully by 2014 compared with what we had in 2009.These are the people who have turned 18 in the last five years.The voting population this time is younger than ever before.The changes to voting population are dramatic then ever before.Now,the Congress won 129-million votes in 2009 to come to power,so this is more than the votes they have won.The other thing I am observing is these people are coming to vote in great numbers.In 20 states in the past three years,the turnout has been a record high in almost every place.The ratio has not just jumped by 1 or 2 percentage points,it has jumped by 10 to 15 percentage points,the striking case being Uttar Pradesh,which has always been lethargic to turnouts,and its not the older generation suddenly realising they have to turn out,its the younger population coming up.I have tested that in the Gujarat elections,they are excited about exercising their rights.The reason is their aspiration levels have gone up.India has added more household debt in the last five years than it had in the starting of 2007.You have double the household debt,that is a signal of rising aspiration.If people spend their future incomes,it means they aspire.The younger generation is very different from the older generation.They are highly aspirational, they want to exercise their franchise and they are a very large part of the electorate,unlike the past.I think they will come to vote,they will vote orderly enough in a single direction,I think they care about their future.So we may get a more polarised outcome than what the consensus is giving.
Ritika, you mentioned about your travels through Muzaffarnagar and Maharashtra.What trends are you observing ?
RM I was in Muzaffarnagar a month before the violence broke out and this acted as an epicenter simply because this is an area were the Muslim-Hindu population ratio is extremely high and normally thats the sort of area that is an epicenter for communal issues.So thats what was the starting point.But as I hear more of what is happening on the ground,there is a clear sense that the violence which began in western UP has started radiating towards central UP in a very big way.So,to that extent,at the national level,once the next round of opinion polls start coming through by November,I think,gradually,the consensus will move that 160 BJP number closer to 180.Thats the direction we are moving in.While I do want the majority government to run this country,one issue is that the BJP might peak too soon.Its critical to be able to maintain that 180 space right from October up until April/May 2014.
How will this rural transformation impact elections ?
NM Whenever I run people through my Silent Transformation thesis,they ask me: Oh my god,Is the Congress coming back Because a large part of India is feeling good about themselves,are they going to vote for the Congress I think they are going to vote for whichever state government is in power.I dont think it will drive a wave for the Congress.But it is very interesting to see that in the head-to-head fights in Himachal Pradesh,Uttarakhand and Karnataka,Congress has won.You can say it's because of the infighting in the BJP,but let's not assume.I agree with Ritika that BJP would be amiss in becoming too complacent too early.
Check Points
MONSOON MAY :not help reduce food inflation as rains were good only till mid-August.Prices of fruits,vegetables and meat are not affected by good monsoon
WORST OF: the currency crisis is over and flows will be steady even after tapering
EFFICIENCY OF :capital investment is falling in India and that will affect growth
BULK OF INDIAN :industry likely to face wrenching pain due to high debt levels and slow growth
AVOID BANKS: the slowdown is beginning to affect consumer goods sector.Technology,a few auto and large caps appear best bets
A SILENT RURAL: transformation is taking place across India and that is pushing up inflation and increasing employment and small business growth
CONGRESS CANT ,be written off and BJP may be peaking too early
