Smoke signals indicate neither doom nor boom

News reports last week said that high net worth (non-retail) money had flooded into the 7.35% tax-free NHAI (National Highways Authority of India) bonds while the retail portion, with a 25 basis point higher rate of interest, saw tepid demand. This can be interpreted in two ways. One, smart money expects interest rates to fall and is hence locking into a high tax-free return. Two, smart money expects stock returns to be muted and is therefore moving money into debt.

People do wonder if they should change their asset allocation and play safe—especially when there is so much talk of doom. China is slowing down and that will cause the next big financial sector blowout. The US Fed has started raising interest rates, so money will flow out of emerging markets. India’s economic reforms are not moving to the next stage, banks’ books are in bad shape, earnings are still sluggish, and the market looks overvalued in the face of earnings. The world is going to end soon.

Of course, the world has been ending every year since 2008. First it was the PIGS (Portugal, Ireland, Greece and Spain) in Europe, then Greece once again. Next it was the Chinese slowdown marked first by the commodity price crash. Now it is both China and the US.

Every year there was reason to fear the worst, but retail investors in India, who held onto a diversified portfolio of funds, have seen an average annual growth rate of about 20% over the past 5-7 years. The current worries on the future of the market stem from the confusion on where the Indian economy is headed.

Smart retail investors now know that the long-term average rate of return on equity is directly linked to the performance of the economy. But is there something to look forward to? Parliament has been stalled, no big bills are going through, the Goods and Services Tax is held up, so is land reform. What is this government doing?

A good way to look beyond the noise is to follow the money. Mint regularly reports on ministries’ spending of budgetary allocation. Data shows that infrastructure spending is up as compared to the previous five years http://mintne.ws/1k8tuKI.

The ministries of roads, commerce, rural development and power have spent more than half their budgets till September 2015. It’s important to know that Plan expenditure has a higher multiplier of 1.6 against 0.9 of revenue expenditure. Construction of many a stalled road or highway is on overdrive; the target of 6,000 km of road construction in 2015-16 is within reach.

There is a consistent move to reduce the burden of subsidies without putting at risk those who really need them. The cooking gas subsidy first went from kind to direct bank transfer. From January, those with annual incomes more than 10 lakh will not get the subsidy. Kerosene is next; from 1 April, it moves to a regime where consumers will pay the market price of 43 per litre and the subsidy amount of 31 per litre will go into their bank accounts.

The 200 million bank accounts opened as of 6 January under the Jan Dhan Yojana are being used to push the subsidy directly to the user, cutting out the leaks in the system. MIT-based evaluation agency J-PAL shows that leakage reduced from 30.7% to 18.5% in areas that were shifted to direct transfer of cash.

The 2012 World Bank World Development Report estimates a one percentage point gain for the GDP by digitising subsidy flows. But this takes time. And we’re impatient to see results.

A Barings private equity partners report, Prime Minister Modi’s Report Card, gives the economy a thumbs-up. It says that foreign direct investment (FDI) is up 51% year-on-year (year ending 30 September 2015) with net FDI flows in FY15 of $33 billion with some of the biggest global names pledging big bucks to Make in India. The report documents the reduction in the time taken to get environment approvals from 30 months to one month. In the past one year, 91 stalled projects worth $40 billion have been put back on track.

With inflation under control and real interest rates positive after almost seven years, money is beginning to flow back into financial assets. The aggregate net inflows in mutual funds went up three times to hit almost 200 trillion till November 2015. The same number was just over 65 trillion in 2014.

The good news is that the sensible long-term way to invest in the markets using the systematic investment plan (SIP) route found acceptance in the retail investor community with a 40% growth in the SIP book. Read more about it here: http://bit.ly/1OMAWbZ.

Existing investors are worried about reforms and growth coming back on track. New investors are waiting for some sign of revival. The process of reform has begun and it will take time to show results. Participating in the equity market in India is no different from the view you have about the future of the country. If you think India will grow, equity is your bus. If you think we’re the next basket case, go for gold—physical gold. Reform is a long road, expecting an economic boom right away is bound to lead to disappointment.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com.