India Markets in 2013: ball is in government’s court

January 1, 2013

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

If calendar year 2012 was the year of scams in India which helped induce some much needed government reforms, the year 2013 is expected to be a year of hope and expectation for India and India Inc. There are expectations on better political governance, fall in inflation levels and hence interest rates, creation of an investment friendly business environment and lots more. It’s also the year with the last finance budget before the 2014 general elections.

Towards the fag end of 2012 the inactivity on the part of the government appeared to have been shrugged off in terms of policy action. This helped improve business confidence a shade. However, there still appears to be near total inaction on the part of corporate India to kick start the investment cycle in any major way. Are high interest rates the hurdle? Is lack of government decision making still a big hurdle? Is the business environment conducive to a larger domestic capex commitment? The answers appear to be almost obvious.

It did appear peculiar that at a time when scam after scam was being detected and there was complete policy paralysis in the government for the first nine months of the year, FIIs invested more than US $ 23 billion in the Indian capital markets in 2012. If consistently more reforms are announced by the government, one can expect close to this figure being invested again by FIIs in 2013.

The key to greater global investor confidence and domestic business confidence will lie in the urgency that the government will show for labour reforms, land reforms, implementation of the new Direct Tax Code (DTC) and the Goods & Services Tax (GST). All this can help bring fiscal deficit under control but most importantly, it can raise the governance bar to an extent that India Inc has greater confidence to create larger capacities within the country.

To expect a runaway rise in Indian equity markets during 2013 would be a folly. There are too many areas of concern in the domestic and global economic environment for that to happen. Much of domestic middle class savings continue to be diverted towards a passive asset like gold or to post office savings which are utilised relatively inefficiently by the state and central governments.

A pre-election subsidy heavy finance budget could derail fiscal deficit sharply. Globally, Europe is unlikely to be out of the woods before mid 2014 and the United States has its own serious fiscal issues to grapple with. On the economic front, a 6-6.5% GDP growth during FY 2013-14 and sustained policy reforms should be considered a possibility. For the equity markets, a potential 10% to 15% rise during 2013 taking the Sensex in the vicinity of 22,000 based on continued FII flows can be expected.


The valuation gap between private sector banks and mid-sized PSU banks has widened considerably during the last quarter. One can expect this to be bridged to some extent. The asset quality concerns of PSU banks are likely to gradually diminish over the next couple of quarters.

The IT sector may continue to underperform, but old economy sectors like cement, metals will gain further momentum. 2012 favourites like pharmaceuticals and the consumption stocks can be expected to continue their upward march, but at a slower pace.

Essentially any upward swing in economic scenario hinges on the political will to set things right. Corporate India is ready out there to up their stakes if the government creates the environment. The ball is clearly in the government’s court.

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