Indian economy is resilient and will strengthen further

Indian economy is resilient and will strengthen further
The Economic Times, November 23, 2009, Page 18

Anand Rathi

THE macro-economic data of developed economies (US and Europe) indicate resumption of growth after many quarters of contraction. Global economic environment, however, continues to be challenging. The stock indices globally have gone up too far too soon. Commodity prices also reflect similar trends. While the recession seems to have ended, the unemployment in the US is at its peak, the highest in 26 years. Credit still remains tight as lenders have turned extremely cautious and the pain of wealth destruction caused by the fall in housing prices continues to depress sentiments as the immediate outlook at ground level remains far from rosy. Barring a few economies like Germany and France, the whole euro zone is affected by similar situation. Markets are keenly looking forward to Christmas sales to gauge improvement in consumer sentiment and spending power as the stimulus effect (improved automobile sales) seems to be petering out calling for a need-assessment for another stimulus. Given this situation, it appears that Fed will continue accommodative measures including low-interest rate regime at least till mid 2010 as recovery is likely to be anaemic for a protracted period.

Ample liquidity at near-zero interest rates has resulted in carry trade shifting to US dollar which has depreciated significantly against major currencies because of fundamental weakness of US economy, high deficits and slow recovery prospects. However, some quarters believe that US dollar is technically oversold and any significant turnaround and resultant impact on carry trade could lead to severe and sharp correction in stocks and commodity indices. As a corollary to weak dollar, gold is exhibiting unprecedented strength and is at an all-time high. While gold may correct 5-7% in the short-term, it may regain strength as both institutional and individual investor segment want to increase exposure as a hedge against dollar. The easy global money has been chasing growth story of select emerging market economies leading to appreciation of their currencies including rupee. While Chinese currency remains tightly paired with US dollar so far, it is now under pressure from US to allow it to get market-linked in a gradual manner. Brazil, however, has levied a tax on inflows so as to avoid ‘hot money’ deluge. Debate has also begun in India in this regard.

For India, it was more of a slowdown than a recession. Our GDP growth during this year would have been higher than the projected 6.5% but for the impact of drought/deficient monsoon. We expect growth to hit 7-7.5% in 2010-11 and cross double-digit in next two-three years. Post reforms / liberalisation beginning in 1991, strong performance by private sector, aided by prudential and conservative policies followed by RBI and regulators, our economy has not only grown but has weathered each successive crisis viz., South East Asian crisis in 1997, tech melt-down in 2000 and now the 2008 financial crisis (mother of all crisis) with least damage. This is in addition to a variety of domestic political, social and economic turbulence. This goes to show that Indian economy has become quite resilient and will strengthen further on the back of inclusive growth and infrastructure investment. Both these themes are domestic economy requirement and the projected growth can be achieved if both these themes are excellently executed and implemented. This strength of the economy and its potential has been recognised by the global investors and is demonstrated by 76% increase in their holding of Indian equities since March 2008 and an $18 billion FII inflow during the current year. The FDI inflow is also on an upswing and has reached $24 billion so far in this calendar and projected to reach $50 billion by 2012 and $100 billion by 2017.

World markets have been inching up gradually and both Dow and S&P 500 sustaining at higher psychological levels at over 10000 and 1000 respectively during the last week on hopes of a sustained recovery. Most fund managers are overweight on emerging markets and expect BRIC economies to offer significant returns and reach new highs over 12-18 months. India and China figure high on this list. It is believed that this century belongs to Asia but it will depend on the domestic demand and these economies should reorient export-led growth to domestic demand and investment-driven growth. Intraday volatility has become the order of the day as the markets seek to balance liquidity and valuations. With the results season behind us, any fundamental triggers to drive the markets in the short run are unlikely, except the PSU divestment drive. Metal stocks continue to gain on strengthening underlying prices. Shipping sector has also witnessed buying interest. The leading sector of the previous week, Banking, is cooling off as high inflation worries fan belt-tightening fears. Sectors whose performance is primarily based on domestic demand viz., Auto and FMCG continue to do well. FIIs continue to invest money helping sustain indices. While it is distinctly possible that the markets give away some of its recent gains in the short run, due to year-end profit booking by FIIs, we would recommend that investors use this opportunity to build quality portfolios for the medium and long-term.
(The writer is chairman Anand Rathi)