The government should take some visible steps to address the current account deficit. An offshore investor looks at the effective dollar returns, and the magnitude of the current account deficit we have potentially exposes the investor to risk on account of currency depreciation. Such a large current account deficit is unsustainable. Right now, the currency appears to have stabilized and capital flows on the portfolio side are strong.
I think the government should take effective steps to boost exports. It is a difficult exercise due to the health of the global economy. Alternatively, import substitution should be focused on—be it on energy, gold, coal or fertilizers. We need to see what administrative or pricing steps can be taken. Fiscal deficit and the current account deficit are linked. Fiscal deficit boosts demand, which is good if it is satisfied domestically. However, if we need to import, it would, in turn, hurt the current account deficit.
The budget definitely needs to be smaller in terms of size. The total size of the expenditure has doubled over the last five years. I hope they bring it down. Whatever cuts are doable in the given political context need to be done, and in addition some politically sensitive steps such as fuel and fertilizer subsidy also need to be explained to the people and be eliminated or reduced.
They should make it easier to do business in our country. India is often ranked in most surveys as a very difficult place to do business. I think we have made some efforts, but still a lot needs to be done. Speedy approvals, single-window clearance are some suggestions. We need to simplify the process.
We need to have a structurally wider participation in capital markets by Indians. We can’t always have offshore investors at the focus. Whatever fiscal steps can be taken to incentivize and channelize the money into the market through, for example, mutual funds, etc., should be taken.
For the macro, I have a fairly cautious outlook. One of the key drivers of growth, investment activity, is likely to remain muted. Further, given the focus of reducing fiscal deficit, the support to growth from government expenditure will also be lower.
I would provide for a no-worse-than-2012 type of outlook for growth, with potential for improvement on the external demand front as the US economy seems to have recovered meaningfully.
The driver of growth continues to be the consumption side. I expect the central bank to cut rates by 100 basis points in the first half of 2013, and to that extent this should address the slowdown in consumption expenditure and also, at the margin, investment activity as well. Globally, given the extent of committed monetary stimulus in place, one can expect risk premiums to remain low and thus flows into all emerging markets (in debt or equity) to remain strong.
Given this backdrop, the direction of the financial markets will significantly depend on how much the market sees the government “walk the talk” on issues like subsidies, fiscal deficit, import substitution, etc. Any announcements on fuel price reforms, on effective steps to curtail gold demand, on steps that can boost exports or reduce import demand will positively impact forex and equity markets. Bond markets should by and large perform well—both because of expected rate cuts and the reiteration of fiscal discipline by the government.
FII (foreign institutional investor) flows should remain constructive given global liquidity and if the authorities undertake steps to channelize local savings into capital markets, that can act as an additional source of demand. Net-net, for the most part, one has to enter the new year on a more positive note.
Hitendra Dave, MD and head (global markets), HSBC India