Nitin Jain, CEO, Global Asset and Wealth Management, Edelweiss Financial Services, says while the government has done its job, the monetary policy has been a drag but for the right reasons. In a chat with VCCircle, he says implementation of GST should be the top priority for the government and that it should stay committed to the promise of growth.
Can you give us an overview of how institutional investors assess the Modi government?
We see a lot of consistency in our investors' opinion on the Modi government. While there have been a few incidents like the MAT episode, which wasn't well appreciated, people are overall happy with the way things have moved. Institutional investors are bullish for the next 8-10 years. Some do want to see more action on the ground, but the reality is that these things don't happen in a hurry. Part of the pressure also stems from the fact that valuations in the market have gone up quite a bit, and in order to justify that level you need a lot to happen, resulting in anxiety amongst investors. Investors are cognizant of Modi's contribution so far, and have faith that things are on the right track.
There are two views regarding the government's performance—one is that of optimism while there are others who believe that Modi has been all talk and less has happened on the ground. What is your view?
We believe that a lot of action has happened. Sometimes we tend to underestimate the kind of complexity one has to deal within a democracy like India. One can't think of reforms in isolation, given the social, economic and political context of India. Looking back, who would have expected that corporate taxes will come down? It is a massive surprise and a big statement of intent. We believe that GST will ultimately go through, which again is a big reform. Considering the way the coal auction process was handled and the government’s commitment to roads and railways, Prime Minister Narendra Modi has been able to identify the structural pain points and is addressing them. The first move has to come from the bureaucrats who have to get into their act and then entrepreneurs would follow suit.
Currently not much action is happening on the ground around capex which is hurting the economy most. Capex is slow due to high interest rates which is caused due to the fear of global interest rates going up. RBI governor is watchful that this could create immense pressure on the currency, resulting in inflation. But if interest rates come down by 150 bps you will see a sudden spurt in capex within six months. Most infra projects are unviable at the current interest rates. Banks are stuck because of low capitalisation and hence are not willing to take risks. But should rates come down, banks will get more breathing space. Monetary policy has been a bit of disappointment for the market but for the right reasons. RBI governor is vigilant as after such a long time we are looking at a lower level of inflation and hence may be in a quarter or two we will see more easing off. Eventually rates have to come down and when they do you will see a huge boost to the economy. A lot is done on policy and it takes a lot of time to translate that into actual GDP growth.
How do you rate the performance of Modi government?
I would be rating the government at 8 out of 10. Expectations ran ahead but I believe a lot has happened.
A year ago, India was the toast of the town among the emerging markets pack. Is what we are seeing now a reflection of over-optimism about how the new government can transform the economy and the country?
Markets are like that, they will always run ahead of reality and that is why they are volatile. What happened over the last one year is that markets have gone up by 30-35 per cent on the index level, but more importantly some quality stocks have gone up 300-400 per cent in the mid cap space. If markets come down 25-30 per cent for individual stocks and index by 8-10 per cent, such correction is a normal part of the course.
Do you think India is still best placed among the BRICS pack?
Absolutely, I have no doubt about that; 90 per cent of the investors would also say that today. While Brazil and Russia are there, focus is on India and China. China has been a big story for the last couple of decades. In the last one year, its economy has slowed down but the stock market is doing exceptionally well. It is a sign of worry as the economy is not doing as well with valuations going up due to high liquidity. So we will have to wait and see.
Is the government on track in ensuring that the capital markets are deepened and banks are adequately capitalised?
There have been a few steps but not many aimed at capital markets and I think that would come in time because today the focus is mainly on banking for all and insurance. So may be capital markets will also follow at some point of time. We believe that if economy does well then capital markets will take care of themselves.
What have been key drawbacks of the government in the last one year? What should the government focus on going forward?
Most of what we expected has been achieved but then we would have liked faster implementation of GST that has been on radar for so many years. In the MAT issue, the government had the right intention but it could have been managed better. For the coming year, GST should be highest priority. It is the promise of growth and job creation that has taken the government so far and we would like to see it continue on the same path.