Indian markets stuck in a rut

September 5, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

It’s now been close to four years since domestic and global financial markets have been in a state of flux, plagued by uncertainty, as a slowdown ensures that government after government revises its growth forecast downwards.

The IMF, the rating agencies and the entire tribe of analysts have been either on a rating downgrade spree or have substantially revised growth projections of economies across the globe. Governments globally, on the other hand, have been splashing around to stay afloat by announcing policy measures or financial subsidies to support their economy, or have been just sitting around doing virtually nothing, like in India.

While the consumption story and the sheer weight of the FII fund inflow into the capital markets continues to support the Indian equity markets, concerns within the domestic economy abound. Coalgate, 2G, GAAR, rising crude oil price, continuation of huge petroleum product subsidies leading to a huge fiscal deficit and leaving the largest petroleum companies in India bleeding under the burden of losses, high levels of inflation, high interest rates eating into company profits and preventing revival of the investment cycle, complete lack of will to undertake policy reforms, unheard of levels of corruption, a continuing logjam in parliament due to Coalgate, the list is endless. All this has led to the impending threat of a further downgrade of the Indian economy — virtually to junk status.

What will all this lead to? A mid-term poll in India? Investors losing faith in equity markets? Will equity markets head steeply downwards? There are too many questions with no visible answers.

The fact remains that despite knowning about a serious governance deficit, a burgeoning fiscal deficit and sharply falling GDP growth, FIIs have pumped in more than $10 bln in the Indian equity markets YTD. This clearly indicates that when compared to other economies, 5.5 pct GDP growth — high in relative terms — will continue to attract global investments. Secondly, unless India runs into a de-growth scenario (not impossible for its set of politicians and bureaucrats), we may not see a run on Indian equity markets. In other words we can rule out a sudden sharp crash.

The Indian economy and the government had everything going in its favour a few quarters back, but has completely lost momentum, lost the faith of several large investors globally, lost the confidence of its prominently contributing corporate sector, all of this its own doing.

Should we have a mid-term poll, even though there is a risk of a hung parliament or the risk of a bunch of regional parties squabbling for political power? Given the current set of macro-economic statistics, a mid-term poll with even a remote chance of a stronger government which will take decisions, is better than a lame duck coalition unable to take any decision.

Quantitative easing and long-term refinancing operations (LTROs) notwithstanding, the global economy is nowhere close to a convincing turnaround yet. Can the Indian economy then go back to above 6 pct GDP growth, or stonewall the possibility of a downgrade? Appears highly unlikely. If there is a downgrade, will it scare away global investors? In the short term it just might, but again, appears quite unlikely. The redeeming factor is consistent growth in the face of this adversity, of sectors like pharmaceuticals, FMCG, IT, two-wheelers, banking, etc. This will ensure that a sharp sell-off is prevented.

Will the equity markets come anywhere close to the previous highs this calendar year? Again appears highly unlikely unless there are sharp interest rate cuts, or the government transforms itself on the policy front. In the best case scenario, India will still be stuck in a rut for at least 2 – 4 quarters of lacklustre growth.

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