By Sourajit Aiyer
Indian markets and economy had an interesting fiscal year FY2015 (Apr 2014-Mar 2015). While early signs of recovery are visible — a reversal from the previous turbulent years — a lot is still needed for the promised “achhey din” (good days) to truly arrive.
The 2014 federal elections delivered a decisive mandate, the first in 30 years, following which the NDA also clocked wins in several provincial elections.
The election mandate strengthened the expectations from the pro-development government of Narendra Modi to deliver on much-needed reforms and on the governance process. This expectation was the main driver of the Indian markets in the year.
The government has taken several initial steps. It is using the “Ordinance” route – bypassing parliament by issuing emergency government ordinances — to push reforms in key sectors like insurance, minerals auctions, land acquisition, etc. More than 10 ordinances have been issued so far.
The way it handled its coalition allies/opposition on contentious issues like land reforms in the Lower House was noteworthy. Infrastructure connectivity, smart cities and industrial corridors are getting a big push, along with the “Make In India” campaign, as a serious effort to boost manufacturing activities and job creation in the country.
Technology/digital initiatives are being explored to bring more citizens into the economic mainstream. Online environmental clearances are being initiated, and a number of stalled projects have started moving, following faster clearance.
The government is now pushing for projects under the EPC (engineering, procurement and construction) route, rather than the PPP (public private partnership) route, given the implementation challenges the PPP model faced in India recently.
Other key initiatives are: 100% FDI in railway infrastructure, increase in FDI in defence from 26% to 49%, and plans for several roads, transmission, airport projects.
The Prime Minister has taken initiatives to pitch India as an investment-friendly destination by visiting key investor countries and show that “India means business.”
FY2015 saw unexpected relief in the form of softening of global commodity prices, which augurs well for commodity-importers like India.
Lower global commodity prices helped WPI (wholesale price index) inflation move south, since manufacturing comprises a large weight in WPI. But their impact on consumer price inflation may be muted, since local factors like food comprise a large weight in CPI.
The government is focusing on food inflation through lower MSP (minimum support price) hike, release of stocks and restrictions on exports.
The lower import bill, especially for crude, helped reduce the trade and current account deficits. Imports had already seen a downward bias under the previous government, which took steps on gold import.
Resultant improved public finances bode well for the fiscal deficit, which hung like a Sword of Damocles above successive governments in earlier years.
These developments furthered the call for interest rate cuts, a precursor to spur the investment cycle. January and February 2015 saw successive rate cuts from the central bank. Further rate cuts may be expected, provided inflation levels sustain at lower levels.
Such continued lower interest rate climate should also bring equities back into investors’ favour, compared with fixed income.
IIP, the indicator of industrial performance, showed some improvement since the later half of FY2015, as manufacturing and mining performance started to pick up.
However, the sluggish capex cycle, together with the hawkish approach of banks following recent asset quality challenges, impacted bank credit growth.
Bank credit growth will remain a decisive proxy to the uptick in corporate activity, and hence economic activity. Capital raising activities, both through IPOs and QIPs (qualified institutional placements, whereby a listed company issues securities that are convertible into equity for qualified institutional investors), are expected to pick up, as a number of issues are lined up.
These should help increase output, and hence corporate earnings. Industry opines that deal closures are also seeing some speed, which had been missing of late.
Overall, the optimistic economic environment is yet to translate into corporate earnings growth. But, as the effect of global commodity prices into lower input costs and rate cuts into lower borrowing costs sets in, along with uptick in the capex cycle, it should lead to an uptick in operating leverage, earnings and profit margins of companies.
In an article next week we will look at what this all means for the Indian stock market.
— The author, Sourajit Aiyer, works with a leading capital markets company in Mumbai. All views are his own.