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Business News/ Market / Stock-market-news/  India needs to have a better sense of time: Roshan Francis Padamadan
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India needs to have a better sense of time: Roshan Francis Padamadan

India's growth over next 10 years will be hostage to unknown factors such as oil price movements and monsoon, says fund manager at Luminance Global

Roshan Francis Padamadan says a chalta hai attitude to decision-making and implementation has been the bane of this illustrious civilization.Premium
Roshan Francis Padamadan says a chalta hai attitude to decision-making and implementation has been the bane of this illustrious civilization.

Singapore: India may enjoy the most favourable demographic profile in the world, but its growth over the next 10 years will be hostage to unknown factors such as oil price movements and the monsoon, says Roshan Francis Padamadan, fund manager at Singapore-based Luminance Global Fund, which invests in securities including stocks and bonds globally. India imports about 75% of its oil requirements, and receives 75% of its rains in the southwest monsoon season that runs from June to September, making it very vulnerable to both factors, Padamadan said in an interview.

Edited excerpts:

How would you rate the performance of the Narendra Modi-led government in its first three months? As an investor, are you disappointed on the pace of reforms as well as the government’s failure to push through tough decisions at the start of its tenure, given its large mandate? Do you sense a bit of disappointment with the new government, and what do you think Modi should do to temper the rising pessimism?

As a fundamental investor, I look for changes in the fundamentals. Nothing has changed—yet. This is disappointing. But we are not in a hurry; we expect to see some action in terms of ground-level execution on various fronts in the coming months. There is so much to do, a lot of low-hanging fruits, in terms of getting the basics right: approving coal projects, power supply agreements, etc. Getting those going will have immediate, meaningful impact. All the government has to do is its regular job. Nothing sensational is needed.

India has always found it difficult to do tough decisions due to dysfunctional politics. The same party will oppose a measure when it is in the opposition, while it may have proposed it when it was in power. Therefore, the issue is not the subject matter, but realpolitik. India can ill-afford such loss of time, as time lost is money lost.

But many key reform proposals require cooperation from the states, and there is nothing that Modi or the centre can do about it—be it general sales tax (GST), land acquisition for infrastructure projects, reforms in the electricity sector and labour markets.

The constitution gave certain subjects to the states, and it is hard to change it without revising that foundation. The centre needs to work cooperatively with the states, and this is a mammoth exercise in negotiations. A reasonable compromise can be found if the politicians are willing to find a solution. I am not holding my breath...still waiting for GST negotiations to achieve what separate countries have been able to agree to in Europe, when they created the European Common Market.

You are of the view that despite India enjoying the most favourable demographic profile in the world, looking ahead at the next 10 years, the country will be pinned down due to unknowns such as oil price movements, and also due to the unpredictability of monsoon rainfall. Can you explain this stance?

India imports most of its oil—about 75% —and that makes it vulnerable to oil price hikes. Hedging is not a solution—it only means you pay for the peaks smoothly over time. Until India finds more oil, an investor in India is forced to take a view on Iraq and the Persian Gulf and the price of oil. If they are not doing this, they ought to.

India receives most of its rainfall—again about 75%—in the June-September period. The dependence of agricultural income on a good monsoon is still very large. The percentage of land under irrigation hasn’t reduced the linkage as the water supply comes largely from the monsoon. Average reduction in total GDP (gross domestic product) was 2.6% during 12 droughts since 1960, as per a study by the Reserve Bank of India and HDFC Bank Ltd. Fossil reservoirs are rapidly depleting, and the water table is getting lower each year in most places, as farmers will testify.

I used to be a climate change analyst at a large global bank. In our research, India came out as the most vulnerable of the G20 (group of 20 nations), by the end of the decade. This is just in the base case, with the small continued rise in global temperatures of 0.2°C per decade. We did not model stress scenarios such as drought, El Niño, etc. All El Niño years do not have a drought, but the probability goes up.

According to you, another factor that can derail India’s growth is the fiscal deficit. Can you explain this? Your views on the subsidies regime in India? Farm subsidies have risen each year, causing inflation.

The currency of a country takes its strength from the government’s handling of its budget. The oil subsidy, the monsoon and its impact on agriculture—say farm loan waiver in a drought year—and foodgrain subsidies all add to a high level of uncertainty in government finances. The government can plan, but the oil market and the rain gods might not be in agreement. Since fuel is still subsidized in India, the variations in market prices flow through erratically to the market, with the government picking up the tab for a bulk of the changes. It is partly passed on to some of the government-controlled firms, adding to uncertainty for shareholders of those. The relentless rise of the minimum support price (MSP) pulls up the price of food each year. Instead of setting a floor for the farmer to have a full cost recovery, it is used as a mechanism to increase farming profits to help farmers. And then the government is surprised each year by the rise in grain prices and its attendant feed-through effect, and warns of strict action against speculators. All this without realizing that it is the root cause. It is the biggest speculator—a speculator who also sets prices. The situation is sadly worse than a common speculator, who at least will not allow the grains to go waste. Wasted grain is paid for by the country in higher grain prices at a retail shop.

The policy on farm subsidies is very skewed, and it can only help the rich farmer and not the subsistence farmer in whose name it is carried out. The farmers who need help the most, the subsistence farmers, end up becoming poorer with the rise in MSP. As foodgrain prices rise, the prices of all farm inputs rise—fertilizer, equipment, etc. For farmers with a surplus, there is a net gain as they benefit from higher revenue from the surplus grain they sell. For the subsistence farmer, the higher input costs translate to less grain to eat. The subsistence farmer has nothing to sell, by definition. This is without looking at the effect of NREGA (National Rural Employment Guarantee Act) and labour costs escalation coming from that, that is a different example of a misguided subsidy.

Only 36 million people in India pay income tax. Everyone else wants to live off these 36 million, making all these subsidies skewed. Welfare programmes can be used in a targeted way to help a small section. In India, a small percentage of the population is asked to pay for the majority, making it very unique from a global perspective.

Why are you of the view that India is the most difficult country if one were to come up with a country risk premium?

India has a variety of industries, some of which are global: information technology and healthcare are to be anlaysed as global sectors, with USD revenue. They deserve a different risk premium than a sector whose income is in INR. This fact, coupled with the three unknowns—oil, rainfall, fiscal deficit—make it one of the countries where I give different risk premia for different sectors, assessing the currency of revenue, exposure to each of the major risk factors separately.

Do you think India’s record foreign exchange reserves will act as a cushion against rupee volatility when global interest rates start to climb?

Not enough. India’s reserves are less than that of the islands of Taiwan and Hong Kong. With inflation, everyone’s salaries are at a record lifetime high, in nominal terms, but that doesn’t mean they are rich. India’s forex reserves have to be measured in terms of months of imports—it is just (enough to pay for) six months’ imports. The current account deficit means Indian currency will weaken if foreigners stop putting money into India. India will be forced to raise rates if global interest rates climb, or risk a massive flight of capital. Worst case is that both happen.

Despite global growth, there is no big pick-up in demand for Asian exports—is that a concern? How do you see China over the next two years?

Asian rig builders are seeing robust demand. But it is too late to buy them, it is late in the cycle, and orders may drop precipitously. China will be the giant driver of global growth in the decade to 2020, make no mistake. I spend time every week learning Chinese. China has a large domestic market, with a scale to support global giants. India, unfortunately, has no single domestic market, it is a series of fragmented state markets. Still waiting for GST. India’s global giants are the ones who have for the most part tapped into global markets for their end product—technology and healthcare in particular.

Why are Indian markets rallying—how long will it last? Who is buying India? Do you feel markets, in recent months, have pinned too much hope over when RBI might start paring rates?

I always wonder—who is buying? It is sentiment-driven, based on expectations of reform, for sure. I lose my bearings in sentiment-driven markets as I have no anchor. If investors are coming in based on an expected rate cut, it is a macro bet, the most difficult ones of all. In my personal account, I have 10-year government bonds—which I bought three years back on expectation of a rate cut. I am still waiting.

From the investors’ point of view, what are the best bets in India and Asia currently?

I would skip trying to read the sentiment and look at companies where you can estimate where they will be in 10 years’ time. Infrastructure and power companies are likely to be in a better place than now.

In China, select consumer stocks are nearing attractive entry points. Some China infrastructure companies have exposure to Africa’s infrastructure build-out and they are quite attractive.

In Korea, spin-offs and demergers from the state’s large financial holding group are providing a lot of feedstock for someone like us who love getting into special situations. Also, we see some Korean firms offering attractive entry points—they have global giants trading at single-digit price-earnings ratios.

In Japan, the macro is too hard to call in that export-driven economy. Avoid for now, wait for better opportunities later.

In rest of Asia: most other sectors are quite fully valued. Stock-specific calls are based on a study of business models and specific price points, so I won’t go into them. Apart from these, I see more short candidates than long candidates, or in other words, I see more downside than upside.

Don’t you think the slow pace of India’s recovery is actually good for both firms and policymakers? Policymakers get time to put their house in order and firms can use this time to get their balance sheets in better shape to capitalize on the growth that will come from reforms.

Time lost is money lost. Make a plan and do it on time. Else what is the point? Capital markets reward companies and countries where a good return is earned per unit of time. India needs to have a better sense of time. Indeed, 100 days is too short to evaluate anything. But a chalta hai attitude to decision-making and implementation has been the bane of this illustrious civilization.

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Published: 21 Aug 2014, 11:09 PM IST
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