'If the Union Budget can provide incentives for animal spirits to come as well as induce demand stimulus and consumption, the Budget would have done a wonderful job.'
Harish Krishnan is senior vice president and fund manager (equity), Kotak Mahindra Asset Management Company. "," Krishnan tells Prasanna D Zore/Rediff.com.
What are the major headwinds and tailwinds before the economy and equity markets going into the Budget season?
Headwinds are normalisation of the economy as vaccine drives bring comfort to the general masses to go about life in a pre-COVID way. It is likely that the developed world will normalise faster than India given India's larger population.
As the rest of the world normalises, one can see commodities like brent crude strengthen, hurting further importing countries like India.
As for tailwinds, India has handled the pandemic well, without significant stimulus and taking up debt. Now, as things normalise, it can give further spending room for the government to spend and stimulate the economy.
How do you think the Union Budget 2021-2022 can address these headwinds? What would be your wish-list for Finance Minister Nirmala Sitharaman?
While maintaining the path of fiscal prudence, if the Union Budget can provide incentives for animal spirits to come as well as induce demand stimulus and consumption, the Budget would have done a wonderful job.
More focus on privatisation, asset sales, and stable tax regime can go a long way in addressing the current macro challenges.
What are the major reforms that the markets will be looking forward?
Today, around 85 per cent of government expenditure is in non-discretionary expenses like salaries, administration costs, interest costs, etc. This leaves little room for government to alter the overall economic landscape in a policy statement like the Budget.
Given this, the focus of government needs to be three fold -- catalyse animal spirits as the private sector after almost a decade of de-leveraging can again evaluate investments and focus on fresh capex and job employment.
Second would be to redistribute the 85 per cent by reining in government departments or PSUs which are no longer strategic.
As they go out of government, the monies saved can be used in other public goods like law and order, healthcare, education, hard infrastructure etc.
Thirdly, focus on improving administrative capacities to spend on infrastructure by raising longer term resources from the world, where in a world of significant liquidity and minimal interest rates, capital is more than available for viable asset creation for India.
Foreign portfolio investors have already poured in a whopping $23 billion in 2020 driving the Indian markets to new all-time highs. How would they react to a Budget that goes soft on fiscal deficit targets and inflation?
Equity investors are more focused on growth recovery and rekindling of animal spirits.
Most investors across the world realise the impact of once in a lifetime event like COVID-19, and they wouldn't penalise (India) if there is a transient breach of these targets.
What measures by the finance minister could further boost FPI inflows into India given that the US Fed liquidity tap is expected to tighten in the days ahead?
While India has got its fair share of equity (both FPI and FDI flows) in the last few quarters, we need less volatile flows from foreigners to keep sustaining.
One way to do that is to enter bond indices (for debt flows) and to allow for higher weights in global indices like FTSE, MSCI for equities.
Government has rightfully amended some regulations in this regard, but more can be done to further improve free float methodology, which forms the basis for global equity indices, as well as raising debt money abroad from investors.
Under what circumstances will the US Fed begin tightening the dollops of dollar liquidity sloshing around in global markets? How will that impact emerging markets, especially India?
India stands out in terms of high forex reserves as well as low ownership of Indian bonds by foreigners, compared to most other emerging markets.
Given this, while any form of tightening measures will impact India on a transient basis, we don't think there is likely to be an enduring impact due to modest tightening by global central banks.
While GST collection has seen its highest ever print at Rs 1.15 lakh crore for December 2020 and may indicate a sort of turnaround in the economy in the near-term, what reform measures could help better this number going ahead?
Akin to a car, we had stopped and were in neutral gear when the lockdown got announced. From there we have slowly moved gears as the economy is slowly normalising.
Many services like education, travel, entertainment are still shut. So in that context, where the bulk of the Indian economy is veered towards services, GST print that we have seen is encouraging.
We need to maintain the momentum without upsetting the apple-cart now.
Hopefully, the vaccine gives confidence that COVID-19 can be history soon and normalcy returns.
What would be your advice to mutual fund investors and retail investors in the stock market in the context of the Budget? How they should manage risks while investing in the markets?
Asset allocation is the prime mantra for investors; markets always veer between extremes of greed and fear.
As long as one is balanced, has a good diversified portfolio across various asset classes and maintains a long-term view on their assets, investors will be rewarded for their patience.
Always remember that things are never as good as they are expected to be nor as bad as they appear.