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2014 to be year of adjustments; investment cycle may take time to revive

19 February, 2014

With upcoming general elections and tapering of quantitative easing globally, 2014 could be an year of adjustments for the Indian economy. At VCCircle India Limited Partners Summit 2014, economists were cautiously optimistic about the prospects of revival in growth.

Roopa Purushothaman, Head of Research at Everstone Capital, noted that the macroeconomic conditions have significantly changed over the last 12 months. From emerging markets, the focus has now shifted to developed markets as India has seen four years of slowing growth and policy paralysis.

So what will be some of the major factors impacting Indian economic growth?

A new government under NDA, which is leading the opinion polls, will have policies looking at reviving investment cycle but they may take time to make an impact. But foreign investors could take a cue from a government looking at structural reforms and money will flow in 12 months before a revival in growth.

“The biggest shift now is quantitative easing as liquidity has been contained. Global liquidity that has helped emerging markets, wishing away all the negatives, is not there now which has hit us,” said Indranil Pan, chief economist at Kotak Mahindra Bank.

“Year 2014 will be one of adjustment for India. One is made with rupee depreciation in current account deficit and three others need to be made. The big one is inflation. India has been running double-digit inflation for nearly four years and RBI is focusing completely on it, which I think is in the right direction. Second is on the fiscal deficit side, where the new government will have its tasks cut out. With monetary and fiscal policy curtailed, the environment is not very conducive to growth. Also provisioning in the banking sector is weak and they will have to raise capital, which will impact lending to corporates,” said Tushar Poddar, chief economist and managing director at Goldman Sachs.

But despite these challenges, there are indicators that there will be a change in economic cycle as investors see markets bottoming out.

“In spite of the most prolonged economic downturn, depreciation in currency and policy paralysis, the global investor interest in India remains healthy. Therein lies the clue for the year ahead,” said Saurabh Mukherjea, CEO of institutional equities business at Ambit Capital.

He said that industrial growth is expected to rise to 4 per cent from 2 per cent, which may not be significant but it is a change in cycle. “Consumption story is well understood but it’s the investment cycle side where one can make incremental returns,” adds Mukherjea.

There could also be some appreciation in the rupee going ahead, which has been one of the worst performing currencies in 2013. “Over the next six months the current account is shrinking as demand is weak.

Also inflows which could be incentivised after the elections which would lead to appreciation of rupee. Beyond six months, inflation dynamic will take over,” said Poddar.

Global factors like a slowing Chinese economy could also help the Indian economy, driving down prices of raw materials and commodities.

“A slowdown in China has impact on raw materials/commodities and could see significant pressure on prices to fall in iron ore, coal and even oil prices,” said Poddar. But there could also be a downside as globally investor reduce capital allocations across emerging markets, which could affect India adversely.

Pan of Kotak Mahindra believes that leverage in India has gone up and the country needs to address a lot of structural issues.

Around 11 per cent of the banking system is under distress. Even if a third of that debt turns bad, it will be 40 per cent of the equity held by the banking system. “Recapitalisation of the banking system will not be cheap,” said Mukherjea.

Also with growth, India also needs to create jobs. “India has added 15 million jobs between 2004 and 2012. We are a country growing without jobs as jobs are being replaced with capital, said Pan. Another concern is that with growing inflation, the financial saving rate of India has been coming down.

But regardless of the outcome of elections, Mukherjea sees several investment opportunities. One is the consumption sector, where despite slowdown several companies are still growing at 20 per cent annually.

“Second set is in export-driven companies. A host of light industrial manufacturing companies, given the weakness of currency, have emerged as the lowest cost manufacturers globally,” he said, adding that agriculture is another attractive sector.

(Edited by Joby Puthuparampil Johnson)


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2014 to be year of adjustments; investment cycle may take time to revive

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