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Trend Spotting

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Watch The Budget
Surjit S. Bhalla

Last year, at about this time, I had forecast that India would grow at about 8 per cent in 2012-13. This was predicted on a reform budget; when the budget was presented by UPA-II’s finance minister, Pranab Mukherjee, it turned out to be the most anti-reform budget in Indian history. This reality has an obvious lesson for forecasters and their readers — be wary!

The really big trend in the Indian economy for the next few years is the steady erosion, and reversal, of the UPA-II’s populist policies. It is now obvious to even the blind (and/or the UPA apologists) that India cannot, and could not, afford the populist welfare expansion of the last few years. This expansion was in every largesse possible: large procurement prices for food which benefited farmers in only a few states but rats in all the states; the food subsidies that went mostly to the middle class, diesel subsidies that went mostly to the rich, fertiliser subsidies that went only to the rich farmers, and employment welfare programmes like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) that were meant for the poor but leakages meant that the middle class could participate in large numbers.

Excessive welfare expenditure has led many a country into crisis — no surprise that India has a large fiscal deficit and a large current account deficit, a depreciating currency, and abnormally slow growth. Given this background, there are three possibilities — either the economy worsens from worse to worst; or it stays at worse; or there is a non-trivial change towards the better. I am strongly in the camp that says 2013 will be much better than 2012, and with the economy likely hitting 7 per cent growth.

The biggest game-changer for 2013 and beyond is the move towards considerably less populism. But this forecast has to contend with the fact that Budget 2013-14 will be the last budget before the 2014 general election. And many contend that this budget will be a populist budget. Phrased differently, the budget will continue to be the same old sob story. So we don’t have to look very far to decide the big trends for 2013 — just two more months. If you want to place your bets, all you have to do is bet on the degree to which UPA-II will continue on its populist losing ways, and ways that have led it to lose on all fronts: declining popularity, declining electoral support, declining growth and increasing inflation.

If the budget is even close to being populist, then these are the trends one can expect. A decline in GDP growth rate to below 5 per cent, inflation above 8 per cent, a widening in the current account deficit, a depreciating rupee and a likely (greater than 80 per cent chance) downgrade of our rating to a (then) richly deserved junk status. And the Congress party heading towards record lows in election 2014 (seats below the 116 it garnered in 1999).

I give this scenario a less than a 20 per cent chance — because I believe that the UPA, and its senior-most leaders, have learnt the big lesson from their populist misdeeds. I think Budget 2013-14 will not be populist. The Centre knows that it has mis-performed — and that it has only one year to get some voters back; and to ensure that it does not go much below 150 seats. If a responsible (60 per cent chance with a 20 per cent chance of it being most responsible) budget occurs, then the trends are not hard to define. Declining inflation (below 5.5 per cent), higher GDP growth (approaching 7 per cent) and a rupee below 50 by the end of the year. Oh, yes, and the Sensex comfortably above its previous high of 21,000.

The big story for 2013 for India is that all the trends are strongly correlated — and strongly correlated with the budget. I made the mistake last year of making my forecast not explicitly dependent on the budget — I am not about to make the same mistake twice. So whichever direction the budget takes, that will dictate the fortunes (or misfortunes) of the Indian economy.
 
The author is chairman of Oxus Investments, an emerging market advisory firm, and a senior advisor to BluFin, a leading financial information company

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The Turbulent Teens
Paranjoy Guha Thakurta

The political economy of India is almost certainly going to become increasingly turbulent during the course of 2013. As the time for the next general elections comes closer, different political parties will resort to various tactics to attract attention. The economy seems unlikely to revive. Here are five important reasons why the coming 12 months promise to be rather chaotic:
 
Mounting Public Anger
The second UPA government will become more beleaguered as those currently in positions of power and authority have to confront mounting public anger and frustration because of their inability to control food inflation, check rampant and brazen acts of corruption, improve the quality of governance by ensuring better security for citizens, especially young women (and not just our netas and babus) and certainty of punishment for criminals. A taste of things to come is already evident from the ham-handed manner in which the government sought to deal with protesters in the national capital recently.
 
Growing Cynicism

There is growing evidence that the government’s attempts to favourably project its economic reforms programme will be met by a wall of cynicism. For instance, the permission granted for 100 per cent FDI in multi-brand retail is being touted as a measure that will be benefit farmers (by giving them higher prices for their produce), remove intermediaries, reduce losses (by improving the supply chain), create new jobs, bring in investments and, above all, bring down consumer prices. A substantial section of the political class is sceptical whether any of the above will actually happen and will continue to argue that, on the contrary, the likes of Walmart and Carrefour will eventually destroy livelihoods when they enter India (probably not in 2013).
 
Cash Transfer May Crash

The government’s ardent desire to step up direct cash transfers of subsidies using the unique identity card, or Aadhaar, scheme and describe the programme as a political game-changer may have limited traction with the proverbial aam aadmi, in whose name all such schemes are supposed to be implemented. Reason: approximately 40 per cent of the intended beneficiaries of government subsidies still do not have bank accounts and the plan to use business correspondents of banks to service such people will take time to be effectively implemented.

The programme can at best make a beginning during 2013, but the bigger goal to bring about a technology-enabled, leakage-free, transparent subsidy disbursement regime is unlike to take place in a hurry.
 
Fragmented Polity
There is every indication that the country’s polity will get more fragmented. In the 16th general elections, the Congress is unlikely to gain significantly in any state other than Karnataka where the BJP is in self-destruct mode — a process that will be aided by former chief minister B.S. Yeddyurappa. The BJP too will probably not gain much in any state other than Rajasthan. In other words, all non-Congress, non-BJP parties could become beneficiaries of this process of fragmentation.

Consequently, a Rahul Gandhi-Narendra Modi type of contest is not likely to happen despite the wishes of many in the country’s two largest political parties.
 
Early Polls
Finally, don’t be surprised if early elections take place in late-2013. This may happen if a section in the Congress (opposed to the present bunch of ministerial confidants of the Prime Minister) manages to persuade the lady in 10 Janpath that India’s ‘grand old party’ is going to get progressively weaker the longer it remains in power.

The author is an independent journalist and educator

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Lucky No. 13?
Nirmal Jain

Investors in Indian stocks have entered 2013 in an upbeat mood. All of us know that equity markets can be volatile and treacherous. Therefore, while 2013 can indeed be a year of great opportunities and the beginning of a bull run, one cannot rule out the possibility of crude surprises. Certain events or news can trigger a trend reversal. The five key triggers for the Indian markets that retail as well as institutional investors should watch out for are:

The Joker In The Pack
Whether we like it or not, crude prices are the single-most important factor for the Indian economy as well as the stock markets. If crude prices come down, our inflation and current account deficit come down and fiscal deficit eases as the subsidy burden reduces. This allows interest rates to come down, currency to appreciate, and investment and growth to pick up. All our macro variables start looking better. Crude oil is the largest item on India’s import bill and its demand is inelastic. Therefore, when global crude prices go up, they wreak havoc on India’s economy, balance of payments and government finances. Crude prices are beyond the control of the fiscal and monetary policy. When crude prices fall and ease pressure on inflation and government finances, you will see our policymakers and government officials attributing these to sound policy steps and taking credit for the same on television channels.

With US gas production at a multi-decade high and growing on the one hand, and demand slowing down in the developed world on the other, there is a fair chance that crude  prices may drop by $20-30 per barrel in 2013, bringing relief on the deficit and the rupee fronts. If that happens, it will be a huge bullish trigger for the markets.

Open Season
The developed world — the US, Europe and Japan — seem determined to print as much money as required to keep the demon of recession away. Shinzo Abe, the recently elected Japanese Prime Minister, has set a target to take inflation up to 2-3 per cent per annum, through an extremely easy monetary policy, low interest rates and depreciation in the home currency. Similarly, the US and euro zone have also been following easy money policies, giving rise to extremely benign liquidity conditions globally. Money is like water and will find its way to avenues of higher returns. In simple words, there will be a huge temptation for global banks and investors to borrow in, say, yen and invest in emerging markets such as India. Relatively, India is still a better long-term growth story and will attract flows of global capital. In 2012, many were surprised by the performance of the stock markets that yielded 26 per cent returns. The underlying factor was investment of about $25 billion by foreign institutional investors. Year 2013 can be even better.

Market Mantra

A vibrant primary market is the foundation for any good capital market. There are hopes that initial public offerings (IPO) will attract retail investors back to the market. There are a large number of IPO issues in the pipeline. If IPOs are priced conservatively, leaving some money on the table for investors, we will see a host of new individual and institutional investors being attracted to the market. While many market men abhor the supply of new paper, I think the supply of good quality paper not only attracts new money, it also gives breadth and depth to a growing market like India’s. Our market can attract a large quantum of money, and supply of new paper prevents a rush for some blue chips, driving up their valuations to dizzy and unsustainable heights. Besides, there are more reasons for retail investors to be attracted to stocks: mid- and small-cap scrips have come to life; and, gold and real estate having risen already, are expected to underperform equities in near future.

Interest Rates Key
It is widely expected that the Reserve Bank of India will start cutting interest rates from January. Most veterans expect a 150-300 basis point reduction through 2013. This is crucial to turn around sentiment and resuscitate the moribund private sector investment in new projects and expansion. In the past few quarters, most bank lending has been only for restructuring or rescheduling loans. India needs continuous capital formation to sustain employment generation and growth in economic output. If that does not happen, India’s economic growth will languish at rates much below its potential or investor expectation. The India story will lose its sheen and global capital will look for alternative markets.

Reforms, Politics And Aadhaar
In the past few months, the government has been able to push through several reform measures. The continuation of these will be key to sustaining market sentiment. Further, what the government does to kickstart large-scale infrastructure spending and remove hurdles in land acquisition, environment approvals, coal supply, etc., will be important. The plan to increase diesel prices by Re 1 every month for the next year, if successful, can greatly ease the fiscal burden. More importantly, the success of Aadhaar would be the one to watch out for. If the government can get over teething problems quickly and roll out direct cash transfers to bank accounts nationally, removing leakages and siphoning off of funds, it would be a revolutionary step.

There are many triggers to make 13 a lucky year.

The author is founder and chairman of India Infoline


(This story was published in Businessworld Issue Dated 14-01-2013)