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Home / Market / Stock-market-news /  Govt’s commitment to fiscal austerity is a big positive: Samir Arora of Helios Capital

Singapore: The big positive from the Narendra Modi government’s first 12 months was its commitment to fiscal austerity; it did not use excuses to give up an obviously unreasonable fiscal deficit target (4.1% of gross domestic product) set by the previous government in February 2014, said Samir Arora, founder and fund manager at Helios Capital Management Pte. Ltd.

Market movement cannot be a gauge of the government’s performance, said Arora. Markets have their own cycles and a government “can influence it beyond a point only if it is very good or very bad", he said in an interview.

The one negative in the past year has been a succession of tax disputes and the government’s reluctance to deal with them at one go, according to Arora.

Edited excerpts:

Your take on a year of the Modi government. What were the highs and lows? What stood out for you in terms of reforms?

I am excited with what has been achieved and promised by the Modi government in the past one year.

At a macro level, I like the idea that Modi has voluntarily taken on open-ended, big-picture challenges that do not necessarily have easy solutions or time horizons.

For example, “Clean India", “Make in India", educate girls, financial inclusion, improve ease of doing business, going after black money are not the types of issues that politicians want to make the centrepieces of their programmes for it is not easy to demonstrate progress in these areas in a one- to two-year time horizon. All our life we have known that India had these problems but did you see any party highlighting them to this level? Focusing on these issues automatically means that Modi will have to reach some milestones in all these critical areas, and that is to everyone’s good.

In terms of specifics, a big positive in the first year was the government’s commitment to fiscal austerity as it did not use excuses to give up on an obviously unreasonable fiscal deficit target set by the UPA (United Progressive Alliance) government in its February 2014 budget. They have also proactively worked to reduce inflation and food inflation, and have, in recent weeks, again demonstrated their willingness to increase fuel prices when the international prices went up.

The only real negative in the past one year has been the successive tax issues that have come up again and again in different shapes and sizes, and the government’s reluctance to deal with them in one go.

As an investor looking at India from outside, has the country done enough to convince you that it is a market one should be in? Have Narendra Modi and the National Democratic Alliance (NDA) government changed the perception of India over the last 12 months as far as investors are concerned?

Very clearly so. In general, the markets have their own cycle and the government can influence it beyond a point only if it is very good or very bad. I think that investors are excited with the new Prime Minister because they believe that he is focusing on the right priorities and goals and is willing to “dirty his hands" and get involved in tackling issues.

Investors have liked India in the past due to a vast choice of good companies in various sectors. After a long time, top-down investors are also favouring India due to various reasons—lower commodity prices, lower oil prices, interest rate cycle, etc.,—along with the fact that it now has a strong government.

Modi has so far exercised caution and has not rushed in for any deep structural reforms. Instead, he appears to have adopted a gradualist approach and has focused on tighter administration rather than rolling out big-bang reforms—should he continue on the same track in the second year, too?

We have never expected that India was ever planning to carry out deep structural reforms. Many people say that the labour laws should be made flexible and public sector units (PSUs) should be auctioned off and Air India should be shut down—and may be all these things should be done, but we have been more realistic in our expectations and invest with those reasonable expectations in mind.

There is so much progress that we can make in India by cutting down corruption, improving governance, becoming more responsive to citizens and investors that if a government does these things sincerely, a lot can be achieved.

If deep structural reforms are done, we would all welcome them, of course, but everyone has different definitions about reforms. For example, many people felt excited that FDI (foreign direct investment) in the insurance sector is 49% and consider it a reform, and we say it is good but what is “reform" about it?

But how do you explain the fact that all the market gains in Modi’s early months have now been reversed? Along with that, industrial production has failed to take off. There is no visible growth in exports and bank credit. Do you think that the poor performance of the markets of late indicates that it has factored in these issues?

The markets have shed their initial euphoria because that is how the markets are in general—volatile.

All we know is that the Indian markets have given returns in the past which can only be dreamt of by global investors.

For example, many investors—including us—do not like PSUs and, particularly, PSU banks, but do people realize that State Bank of India has given higher absolute returns than Warren Buffett (Berkshire Hathaway Inc.) for the past 20 years and in US dollar terms? This is not a recommendation for the stock and we do not own it ourselves, but it is more to highlight the opportunities in the Indian market.

But did the investors put too much faith in Modi after seeing last year’s mandate? Did they think that with a majority in the lower House, he could push through deep structural changes and roll out big bang reforms? Did they fail to see the reality that the Modi-led government did not have a majority in the Rajya Sabha? Is this oversight beginning to hurt investors now, considering that goods and services tax (GST) or the land acquisition bill or even the FDI in insurance have all been stalled?

This is true but we believe that the opposition parties will find it difficult to oppose everything for the sake of opposing it beyond a point. We would be disappointed if the GST bill is delayed too much although at this stage we would expect the land acquisition bill to take more time.

But is it not to the credit of this government that it is willing to stake so much political capital on the things it feels are needed, rather than adopting the easy path taken by the previous governments of backing off from controversial issues?

What is the current view on the market? Why have the markets been volatile? Have they corrected enough, or do you see it falling further?

We are bullish on the market for we believe that a normal cyclical recovery is around the corner.

It is our job to handle market volatility and remain true to our convictions. We believe that economic recovery will automatically happen with time for, at the very minimum, the government is not doing anything negative to impact a normal cyclical recovery.

Private capex (capital expenditure) will still take time for companies in the infrastructure sector do not have the balance sheet or the market’s confidence to make big investments and, therefore, the capex cycle will have to be led by government spending and we think that it should have already started with the start of the new fiscal year of the government.

The difference this time is that the rules of the game are being changed for the corporate sector, so not everyone will benefit. For example, with the government’s focus on restricting the generation and usage of black money, it cannot be that everyone will benefit and no one will lose for obviously there were major sectors of the Indian economy which would have been the beneficiaries of the same black money in the past—say real estate or luxury or gold, etc.

Similarly, if the government collects huge amounts from the corporate sector for rights to spectrum and coal and mining rights, it cannot be the case that the same corporates will benefit from these new rules.

India was among the best performing markets last year, but so far this year, it has done poorly when compared with other emerging markets. Was 2014, therefore, a one-off year?

2014 was obviously a one-off year in the sense that the market indices are not supposed to go up 30% plus on an ongoing basis.

However, to be bullish on India does not mean that one is expecting such high one-off returns. Any return above 15-18% in INR terms is a very good return and consistent with returns over long periods in previous years, expected nominal GDP growth, expected corporate profit growth over the next few years and current valuations.

If some foreign investors think that they would rather chase Chinese market momentum at this point, we can only wish them luck.

The domestic investors owned 45% of equity in the early 1990s, and this has fallen to around 9% currently. Despite having several companies whose growth, market cap, and management can be compared with global peers, why are investors still staying away?

Indian investors have been shaken by stock market volatility in the past. Gold and real estate investments gave good returns, plus one could invest large amounts of black money in these areas. With both real estate and gold proving to be bad investments in recent years and inflation rates down, investors will on their own allocate more savings to financial assets.

Are you worried that there are no signs of an earnings pickup?

No, I am not worried for I believe that with the building blocks in place—GDP bottoming out, interest rates declining, inflation in control, pace of investments picking up, commodity prices down, it is only a matter of time before corporate profits start growing strongly again. We are not believers that the corporates know anything more about their own businesses to take seriously their current state of despair. We have seen that in 1999 the Indian technology sector did not know that a slowdown was coming, or in 2007 that the infrastructure sector will stall; so why do we overly believe in their individual stories now? Look at the big picture and the macro conditions, and we seem to be improving everywhere.

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