India is going through a critical phase of growth amid chaos. What was once a promising and rising economy had somewhat lost its sheen midway. Suddenly, everything was looking gloomy a few months back. There were concerns about growth slowdown, high inflation, policy paralysis, corruption allegations, weak investor sentiments, high current account deficit, and the list went on. To sum up, high growth, which was taken for granted, was not automatically achievable. Standard & Poor’s (S&P) and Moody’s had warned about rating downgrades.
In the midst of this, in September, the government swung into action and what followed seemed like a giant waking up from slumber. Announcements like the diesel price hike, the capping of subsidy on LPG (liquefied petroleum gas) cylinders, foreign direct investment (FDI) in retail, aviation, among many other things, restored the growth agenda of the government. It also kicked off an ambitious public sector unit divestment programme. The Sensex, Nifty and other key barometers of the financial markets reacted positively to the reform initiatives of the government.
However, there is a long way to go to ensure sustainable growth. Inflation is high but is coming down. GDP growth for the first half was at 5.4%. S&P still sees a chance of a rating downgrade. Revival of capex investment will be the key for the virtuous cycle to begin.
My personal view is that some actions are required by the government to revive economic and investor sentiment. Among the first is the need to finish the tax reforms, which include the much-awaited goods and services tax (GST), as I believe it will ease movement of goods. It will also add to GDP growth and to the taxes in the medium term. Second, the government should ensure long-term availability of fuel for power sector as the cost of non-availability is very high. Third, the government needs to adopt a credible fiscal consolidation plan by reducing wasteful expenditure and capping subsidies. We hope that the cash transfer for subsidies will bring considerable savings to government as well as increase effectiveness by preventing leakages. Fourth, there is an urgent need to kick-start investment activities to build capacity, especially in the crucial infrastructure sectors, which will reduce import dependence. Last but not the least, there is a need for increased governance to tackle corruption to ensure strict law enforcement and its adherence.
Going forward, inflation is expected to fall, which will clear the path for RBI (Reserve Bank of India) to cut rates. Also, I believe growth has bottomed out and will recover in the next few quarters to above 6%.
The recent government actions will provide much-needed support to these sentiments. This will also provide some relief to the corporate sector as many companies are reeling under stress. In this backdrop, we expect domestic financial markets to perform well in 2013. The interest rates on government securities and corporate bonds will fall, which will result in a rise in bond prices. Also, equity market valuations looks reasonable at 14 times price to earnings. We expect equity markets to provide decent returns.