Clarity on GAAR can be a significant positive

Suresh Mahadevan, head, India equities, UBS on the five things the govt needs to do to revive the economy
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First Published: Tue, Feb 05 2013. 09 51 PM IST
Suresh Mahadevan, head, India equities, UBS. Photo: Business Standard
Suresh Mahadevan, head, India equities, UBS. Photo: Business Standard
Updated: Thu, Feb 14 2013. 03 36 PM IST
From the perspective of a foreign institutional investor, the five things the government needs to do to revive the economy and investor sentiment are:
Road map for fiscal consolidation: If the budget presented in February lays out a clear road map for fiscal consolidation and provides for regular checks to track progress on implementation, it can be positive for both the economy and sentiment. Progress on the goods and services tax, the direct taxes code, diesel and urea regulation, managing subsidies and divestments can all be part of the fiscal consolidation effort.
Fast-tracking infrastructure projects: A positive step has already been taken in this direction with the approval and setting up of the cabinet committee on investments, but actual implementation needs to be seen for this to be positive for investment cycle recovery and hence economic recovery.
Control inflation: This can be done by a combination of supply side reforms, lowering fiscal deficit and ensuring that the rural jobs guarantee scheme adds meaningfully to the supply side, which it currently does not seem to.
Clarity on general anti-avoidance rules: This can be a significant positive, in our view.
Making investment process easier versus other competing countries: This is true of foreign institutional investors, foreign direct investment and qualified foreign institutional investor investments. Our starting point should be to study how other countries do it and then take the best practice and keep the process simple.
Outlook for 2013: We are constructive on Indian stocks as we believe a gradual but mild economic recovery is ahead, premised on stabilization or improvement in three key economic imbalances—trade deficit, fiscal deficit and inflation. Government announcements on reforms over the last three months have somewhat revived sentiment, but signs of a sustained investment cycle recovery are needed before the mood turns structurally bullish.
An export recovery is likely to aid the trade gap in 2013 as import demand may take longer to rebound. The government may present a market-friendly budget for 2013-14, with a clear road map for fiscal consolidation. Though inflation in India has become sticky, the estimated inflation for the next fiscal year should slow by at least 1% or so due to depressed capex, slow credit and slow global producer price index inflation. Policy interest rates may have scope to drop 1 percentage point once inflation capitulates fully in 2013. The rupee should start to appreciate from the current levels to reflect an economic recovery in 2013.
The government seems to be both politically and economically inclined toward reforms. If it does not sustain this path, the economy could stagnate or even worsen, hence one can be optimistic that the reforms process will continue.
2013 is likely to be a story of two halves. The first half should be positive for Indian equity markets, with an easing rate cycle and even the Budget potentially surprising positively. However, in the second half, politics may be a risk, as we near the 2014 elections, because current government allies and supporters may be willing to withdraw support. The Nifty could potentially trade between 5,500 and 6,600 points in 2013.
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First Published: Tue, Feb 05 2013. 09 51 PM IST
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