#ModiYearOne: FY16 will be painful as earnings adjust to reforms, says Saurabh Mukherjea

The Indian economy may struggle in FY16 as earnings adjust to the initiatives launched by Prime Minister Narendra Modi to clean up of the economy, according to Saurabh Mukherjea, CEO, Institutional Equities at Ambit Capital.

In a chat with VCCircle, Mukherjea says the economy is fast losing traction and that GDP for Q4 of the last fiscal will be tepid and will incorporate the slump in industrial growth.

How do you reconcile the dissonance between headline growth numbers and high frequency indicators? What policy implications does it have?

I don't think there is anything unreliable about GDP figures—because it is a new series and constructed in a way which is slightly different from how IIP data are collected, it will take us some time to get accustomed to it. I don't think it is a data problem; there is a further slowdown in the economy. In the last three or four months, the economy has slowed down sharply and I am pretty sure the GDP data will pick it up. So I don't think there is some profound methodology solution; CSO has brought some new methods to the table and it will take a while for us to get accustomed to it. Those methods are credible methods. My reckoning is when GDP data for Q4 emerge they will be very tepid. CSO is not trying to pull the wool over anybody’s eyes.

The recent trend in the stock market has thrown two views. One is that it is a dead cat bounce and the other is that it has bottomed out after a healthy correction. Looking at the macro fundamentals and the near-term outlook on the economy, which view would you like to support?

What happens in any market is that you get a process when expectations build up and between September 2013 and January 2015 the expectations were that there will be a new government and a quick economy recovery and as a result, there was a rally. The expectations of a quick economic recovery were unfounded. I don't think we are entering some sort of bear market but I do believe we are entering a slow cycle between now and around Christmas in terms of earnings. FY16 earnings could pull back by as much as 10 per cent and as it happens it will result in a downward pressure on the market. So in the absence of economic recovery materialising in the current fiscal, there is a disappointment in economic growth which in turn will translate into pressure on the stock market. 

Reforms that the government is pushing through— on the fiscal front, the subsidy front, black money, crony capitalism and the whole interface between politicians and corporate class—are fairly fundamental ones. The way business is done in India and the government interface is changing, these are structural changes and as a result there is a short-term cost in terms of pain in the economy but long-term benefits should come through over the next couple of years.

Although global crude prices are still much below the level a year-ago, retail fuel prices have risen back to the same level and the cushion of low fuel prices and its impact on inflation has waned. Any further uptick in global oil price and any disturbance in weather could pull up inflation.

How significant is the risk of inflation bouncing back with crude prices hardening?

I don't think the government can take credit for fruits and poultry prices coming down over the last year. On the other hand, the government can certainly take a lot of credit for prices of wheat and rice falling because MSPs were not hiked and FCI stopped buying; so food price correction helped pull down CPI and that helped pull down overall wage growth and that resulted in inflation moderating. The inflationary impact of crude prices going up is not a big deal because within CPI only 10 per cent is driven by crude-related products.   

What more can the government do to improve the health of the economy?

I don't think there is anything it can do in particular—it is doing the right thing. It has showed fiscal prudence and is trying to clean up the mess around corruption. It is trying to clean up civil service and public sector enterprises. The black money bill should be a step forward for the country. The prime minister is clearly resetting the economy; I don't think he and his core team are losing much sleep on short-term consequences. The government’s vision is to reset the economy from a subsidy, crony capitalism and societal perspective. It has changed the way things are done. The government is putting India on a detox regime to control corruption and black money. As we economy is put on a detox, it will feel some pain. FY16 will be a year of pain as earnings adjust; there will be also be some near-term pain in the stock market.

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