We'll do just fine, relatively speaking

Based on what we are seeing in the global macro scenario, 2015 is shaping up to be a very turbulent year. A Chinese slowdown and the country’s debt problems, the US rate hike, European slowdown, emerging markets currency crisis, Japan’s return to recession… it’s a full, packed, crisis-rich menu that we are being served. So, how will India fare? 

The Indian market has gone up since the elections but the reason behind that is not what is commonly believed. The consensus was that the market would go up because the problems afflicting the core domestic sector would be addressed. But this optimism has proven to be a bit premature. The inescapable reality is that power, steel, cement, infrastructure, oil and gas and other sectors across the board are lower today compared with where they were on May 16, 2014. 

In short, investors who bet on a recovery and resolution of India’s core sector problems have been taken to the cleaners. Conversely, investors who bet that nothing really would change, and that old favourites such as IT, pharmaceuticals and automobiles would continue doing well, are looking really smart. Pharmaceuticals, IT and other export-oriented companies have been the major contributors in the market’s rise from 21,000 to 28,000. Those were not the sectors that were hurting; they have already been doing well enough over the past decade.

The Indian stock market is comprised of exporters to the extent of 45%, in terms of weightage. Given my view that the rupee is headed for a steep fall, these sectors will go up by 30-40%, as a result of which the broad market will go up by 15%. So, even though the market will go up, it won’t be for the reasons that people assume it will — that the new government, which is well-intentioned, will turn around the hurting sectors. It will take a lot of lateral thinking for the government to overcome the ossified problems in infrastructure in India.

For one, infrastructure is a loss-making business at its core. Hence, to expect the private sector to spend on something that the government should be spending on is not going to work. Hence, I see no easy way out of the infra logjam.

I don’t see GDP growth reviving in 2015, contrary to what almost everybody expects; I would be pleasantly surprised if we cross 5.5%. The drivers of GDP growth (private investment, government expenditure, net exports) are simply not robust enough to achieve a higher rate of growth. Inflation has toned down but, mind you, at 5%, it is still growing; only the rate of change has slowed. The trade and current account deficits are worryingly large now, up nearly 80% over the last year. In a world where growth is an increasingly scarce commodity, I don’t see what rabbit India can pull out of its hat to achieve the 7-8%  [GDP] number that folks toss around nonchalantly these days. A bit of level-headed analysis doesn’t quite bear these forecasts out.

The second point is about global macro factors. The world is teetering on the edge. Fake, steroid-boosted stock market rallies have been engineered across the world since 2009. But the ground economic reality across the world has gone from bad to worse. The rise of the US dollar has crushed commodities and has also killed all currencies, from the Australian dollar to the Brazilian real, mitigating the positive effect of lower oil prices on the global economy. Hence, this is hardly a go-go environment that we are in.

In the context of emerging markets, India has been doing very well since the crisis began in 2008. We need to acknowledge that India has been very favourably positioned against other emerging markets since 2008, when the global crises began. What happened then was that when the global economy slowed down, all countries tried to stimulate their way out of trouble. They all had massive stimulus programmes. So, everyone — from the US to Europe to China — spent trillions of dollars trying to reinflate their economy. 

India didn’t do that (no major big bang spending or super-large spending that would temporarily boost growth but it wouldn’t do anything good in the long run but would only add to the debt of the country). That was a very sensible thing to do on part of the United Progressive Alliance government but thanks to the Congress’ utter disaster of a marketing campaign (if, indeed, one could call it that), nobody gives the previous government much credit for such adroit macro management.

Irrespective of what happens to the rest of the world, in my view, Indian stock markets will perform well. In fact, in times of crises, they do better than the rest. In a crisis, you want safety. Within the emerging market basket, India is the safest market both on macro-economic as well as corporate parameters.

Now, a final reality check. In my view, the government is trying to do things on the power front and road front but let us do a bit of clear-headed thinking: India is already an ecological disaster because it’s a densely populated country. So, there is always big pressure in terms of land and, therefore, big pressure on protected areas. So, to clear land for projects, we will have to destroy habitats, forests, degrade the environment and become a bigger ecological disaster than China.

If we are prepared for all that, then let’s go for growth. That’s what the rich and the middle-class want. Similarly, the challenges for the government are a lot as there are many complex issues. If we look at labour reforms, the BJP’s own Mazdoor Union is opposing it. We are still a democracy; we are not a dictatorship. Of course, stock markets don’t care much about human lives and their state, as it is a simple mechanism that measures a binary phenomenon: growth or no growth. The cost of growth is not the stock market’s problem.

Overall, in my view, be bullish on the Indian stock market simply because the rupee will depreciate, and, hence, IT, pharma and autos will do well. But betting on a strong domestic growth revival is a bet only the brave or the very foolhardy should take, despite a very well-intentioned government. But, then again, I have never seen a badly-intentioned government in India; though that doesn’t automatically guarantee good outcomes.