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'Budget presents Jaitley with 3 rare opportunities'

By Indrani Roy
Last updated on: February 23, 2016 13:28 IST
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'Swachh Bharat Cess imposed last year should be made broad-based.'

'Budget should be predominantly economy/ business-oriented and problem-solving rather than political consideration-based.'

Indians' hopes for achche din seem to have taken a backseat at least for the time being.

With stock markets going back to pre-Narendra Modi days and the rupee finding new lows, the aam aadmi has plenty of reason to worry about the economy.

Investors too are at a loss and economists are busy working out solutions to help India counter the present crisis.

In an email interview, Amit Rathi, below, left, managing director, Anand Rathi financial Services Limited, talks to Indrani Roy/Rediff.com about Budget 2016, the present crisis of confidence, the impact of China's economic woes on Indian markets, and the role of foreign investors.

Coming to Budget 2016, how difficult will this year’s event be for Finance Minister Arun Jaitley?

The Union Budget is but a prospective financial statement of the central government for the next financial year.

It, therefore, is almost impossible for any government to please one and all through a Budget.

The government being the single largest spender of the economy, the only player with the power to change tax rates and unlimited borrowing capacity, the Union Budget, assumes great importance in an emerging market economy like India.

The most important aspect of the Budget is that it communicates government’s economic priorities and strategies for the year and also the years to come.

What are your expectations from the Budget this year?

The forthcoming Budget provides the Union government three rare opportunities.

First, three major state elections -- in Kerala, Tamil Nadu and West Bengal -- are scheduled for the next financial year.

Going by past electoral performances, the National Democratic Alliance government does not have major stakes in any of these states.

This offers the space to the Union government to make the Budget predominantly economy/ business-oriented and problem-solving rather than political consideration-based.

Second, despite all our woes, India stands out as the beacon of hope in the current subdued global economic environment.

At this juncture an economically and fiscally responsible Budget that aims at improving the conditions for doing business would substantially enhance India’s global standing.

Third, unlike most emerging market economies, the subdued international commodity prices allow India to simultaneously effect fiscal consolidation and inflation control.

These opportunities should not be frittered away.

Which areas you think should the Budget focus on?

In terms of focus, I expect four areas to attract special attention of the finance minister in the forthcoming Budget.

These are:

  • Addressing rural and agricultural distress,
  • Boosting investment, especially in infrastructure,
  • Improving employment opportunities rapidly through support for entrepreneurial endevours and job-oriented skill development

and

  • Realising the objective of a more equitable India through broad-based inclusion initiatives.

Is there any step in particular that you want Jaitley to avoid?

Adhering to, let alone furthering, fiscal consolidation targets in periods of disinflation and thereby low nominal income growth is challenging as is evident from the recent direct tax collection data.

Moreover, while shouldering the responsibility to implement the recommendations to hike the pay of the government employees, the current budget would need to accelerate investment on infrastructure and the rural economy.

Despite these, we anticipate little fiscal slippage in the next year.

The savings of fuel subsidies because of the expected continuation of low global crude oil prices would be a boost.

In fact, increased indirect tax rates on petroleum products should improve government revenues.

Increased use of Aadhar-enabled payment mechanism for the distribution of government’s welfare measures would also save money by reducing leakages.

We do not expect any major change on the provisions for direct taxes.

There could, however, be measures to broad-base service tax and in the run-up to the implementation of Goods and Services Tax, the tax rate also may go up modestly.

The Swachh Bharat Cess imposed last year should be made broad-based.

Moving away from the Budget, the markets at the moment are extremely bearish. Do you see any improvement in the near future?

Much of the recent bearishness in the Indian equity market is emanating from international developments, mostly from China, and a large part of these are not fundamentally important for India.

Consequently, Indian equity seems to be in the oversold zone and therefore the “extremely bearish” sentiments are not justified.

But, so long as the international data flows remain negative and sentiments do not improve, Indian equities are unlikely to post significant gains.

So taking a short-term call at the market-wide level at this juncture is very difficult.

All I can say is that the downside to the Indian equity market from here looks limited.

Indian markets are back to the level they were when Narendra Modi came to power. What happened to all the exuberance?

Over the past two years, the Indian economy has done rather well in absolute terms and extremely well in relatively terms -- as compared to most other countries.

Growth has accelerated, inflation has fallen sharply, current account and fiscal deficits have narrowed and rupee has remained largely stable.

While corporate performance in nominal terms has deteriorated, adjusted for deflationary trends, the situation has not worsened much as reflected in largely unscathed corporate margins.

Yet in this period, global economic and financial developments have been adverse and liquidity and sentiments have deteriorated sharply.

On the domestic front, the sentiments have moved from extreme euphoria to manic depression.  I feel, we in India were unreasonably optimistic earlier and unreasonably pessimistic now.

That is what has happened.

Some of the recent economic data have been pretty depressing -- Index of Industrial Production fell 3.2 per cent in November, capital goods contracted 24.4 per cent, retail inflation rose to 5.61 pc in December -- do you think the so-called Modi magic is over?

All these are high frequency data and these are notoriously volatile in the short-term.

Despite the data flows you mentioned, the medium-term trends of improving industrial production and soft and stable inflation remain largely unaltered.

I do not see any magic or the lack of it here.

Many economists are disappointed with the government’s slow pace of reforms. What is your opinion?

I see reforms, especially in a thriving democracy like ours, as a process rather than an event.

The process sometimes gathers pace and at some other point it slows down.

As long as the intent to reform is intact, I would not lose much sleep over it.

That said, there is little denial that some of the important legislative reforms are going much slower than what we anticipated or what we want the pace to be.

Yet, one should not look only at legislative reforms. The administrative reforms are gathering pace.

Most importantly, almost all state governments today are bending backwards to attract investment and they are doing so by improving the conditions for doing business in their respective jurisdictions.

That is a major change and many observers are missing this game-changing development.

What do you think needs to be done to take India to a better growth path?

Four key things that should be done on immediate basis are (1) reduction of cost of funding for corporate and retail customers by sharply reducing the policy interest rates, infusing liquidity and improving transmission of these measures, (2) improving the asset qualities of the banking system through changes in the management structure of PSU banks and capital infusion by the government, (3) greater inducement for infrastructure capex and (4) introduction of Goods and Services Tax.

Do you think the Goods and Services Tax bill will be passed soon? How important is it for the Indian economy?

There are considerable uncertainties on this.

Full introduction of GST by April 1, 2016, looks unlikely. This would be a major game-changing event for India.

What, according to you, are the positive and negative aspects of the Modi government as far as India’s economic progress is concerned?

The intent to introduce market-oriented reforms and improving the conditions for doing business are the biggest positives.

This government has so far faced extremely bad internal (for eg, three successive weather-disturbed cropping seasons) and external (for eg, sharp Chinese slowdown, global growth deceleration and exchange rate volatility) environment.

Moreover, performance of the government is also being measured against the backdrop of extremely high initial expectations.

However, I think the government could certainly do a better job in creating broader consensus on major legislative reform issues and speed up administrative reforms.

Most analysts are blaming the China markets for the present downtrend. But we also come across many media reports that state that China’s pain is India’s gain. Could you please explain this seeming contradiction?

This basically is the debate on decoupling. The process never translates in the short-term.

China accounted for over 50 pc of the global growth during 2009-14.

So a sharp Chinese slowdown impacts India negatively in the short-term, especially by making investor sentiments negative on emerging market economies.

In the longer-term, the process is likely to positively impact India by making the country a preferred destination for manufacturing activities and investment.

Softer commodity prices due to reduced Chinese demand also would help India -- a rare net commodity importing emerging market economy.

Amit RathiUnder the present circumstances, what should the investors do? Should they buy, sell or hold?

At the onset I have made it explicit that I feel that macro and well as corporate fundamentals in India remain largely robust and the Indian equity market seems to have over corrected.

Therefore, I suggest investors with more than one-year investment horizon to increase equity exposure.

At this point in time, which are stocks you will advise your clients to buy?

We recommend institutional equity investment clients to increase equity exposure and non-institutional clients to increase exposure to collective equity investment schemes like those offered by the mutual funds.

Rather than giving specific stock tips, I would like to tell that we are positive on companies in sectors such as infrastructure, logistics and consumer durables while we are negative on global cyclical including metals and oil & gas.

Foreign portfolio investors recently sold shares worth a net of Rs 1319.24 crore (Rs 13.19 billion). Your comments.

This is not India-specific.

These funds are selling in most emerging markets.

What is heartening is that while foreign institutional investors are selling, domestic institutional investors are generally more than compensating for this.

A rebalancing between FII and DII holding of Indian equity is something extremely positive for the long-term stability and growth of the Indian equity market.

How attractive is the Indian market to foreign investors at the moment?

The current equity indices levels, valuation multiples and rupee exchange rate level make Indian equities extremely attractive for FIIs against the backdrop of strong macroeconomic and corporate fundamentals.

But for an FII facing redemption pressure or taking a global strategic call to reduce equity/emerging market exposures, other factors hardly matter, especially in the short-term.

The top image is used for representational purpose only. Photograph: Reuters

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