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Government should improve the investment cycle

Jyotivardhan Jaipuria of Bank of America Merrill Lynch on how the economy can be revived
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First Published: Tue, Feb 05 2013. 01 22 AM IST
Jyotivardhan Jaipuria of Bank of America Merrill Lynch. Photo: India Today Images
Jyotivardhan Jaipuria of Bank of America Merrill Lynch. Photo: India Today Images
Updated: Thu, Feb 14 2013. 03 13 PM IST
The five things that we want the government to do to revive the economy and investor sentiment:
Improving the investment cycle: We believe this is the key to a sustained economic recovery. The government needs to improve (a) business confidence and (b) grant faster regulatory clearances. The proposed National Investment Board (NIB) or CCI, as it is now called, will be a step in this direction.
Reduce the fiscal deficit: This will include steps to reduce subsidies including fuel and fertilizer subsidies as well as steps to curtail wasteful expenditure.
A reduction in the fiscal deficit could help reduce interest rates in the country.
Ease the balance of payments problem: India is running a big current account deficit that has hurt the currency substantially. Overall, there are longer term as well as short term measures required to solve the current account problems.
In the short term, the government needs to provide sops for exporters as well as for foreign flows into India. The longer-term measures include steps to explore more oil in the country and a policy to increase export competitiveness.
Introduce the goods and services tax: The introduction of GST would enable a common market in the country and ease distribution costs. It will also promote greater transparency in declaring actual production and sale.
Removal of short-term capital gains tax on equities: This will be a big boost to the equity markets. The tax concession could be made revenue neutral by raising STT (securities transaction tax) by a corresponding amount. This will also eliminate the controversy about GAAR (general anti-avoidance rules) and the funds that come through tax havens like Mauritius.
We expect the markets in 2013 to be driven by the 3 Rs (recovery in earnings and economy, rate cuts and reforms) with the 3 Ps (politics, performance and positioning) acting as headwinds. Overall, we expect the market to provide a low double-digit return in 2013, in line with earnings growth.
Recovery in GDP growth: We expect GDP growth in FY14 to recover to 6.5% from 5.5% in FY13, mainly due to a pick-up in consumption. Nevertheless, we remain cautious on the investment cycle.
Recovery in earnings: Like GDP, we see earnings recovering from 7% in FY13 to 12-14% in FY14 (slightly below analyst numbers). More importantly, the two years of sharp earnings downgrades seem to be behind us.
Rate cuts: We expect the Reserve Bank of India to cut rates by 100-125 basis points as inflation stabilizes and it focuses on reviving growth. A basis point is 0.01 percentage point.
Reforms and politics: We expect accelerated reforms and high investor expectations until February 2013. But with the current government in a minority, reforms could get tougher in the second half of 2013 as the country gets into election mode.
Positioning, supply, could be a drag: While near-term liquidity remains high, flows to secondary markets could ease over next few months as (a) supply of paper picks up and (b) GEM (global emerging markets) funds now have their highest weight in India in six years, and with India already one of the best performers in 2012, the margin for error is low.
Jyotivardhan Jaipuria is managing director, Bank of America Merrill Lynch.
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First Published: Tue, Feb 05 2013. 01 22 AM IST
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