Indian Macros have been improving over the last several years with several indicators improving. These include inflation, fiscal deficit, current account deficit, corruption in the system and potential for stronger longer term sustainable growth. The state election results that have come out now have reinforced the story with the possibility now of greater strength to the central government, stronger potential reforms and receding of political risks over the next several years. The Indian story is the best it has ever been.
The often repeated commentary that you hear these days is more to do with Price Earnings ratio being very high, Indian Market share of global market capitalization being higher than longer term averages, US FED rate hike fears etc etc etc. These are just noises which as a long term investor you need to ignore to make serious money out of equities.
Indian inflation today is at the lowest level on a sustained basis that it has been for years. This combined with reducing fiscal deficit creates a situation where relative inflation differentials between India and the Developed economies will be the lowest in history. In a situation where there is lot of noise around US FED increasing rates it insulates us in a manner where our relative interest rates will remain low and even in absolute terms the interest rates are now not restrictive for growth. Low sustained inflation reduces inflationary expectations and creates a situation where longer term interest rates remain low. The government has been steadfast in maintaining and reducing Fiscal Deficit as it recognizes it as a big financial stability risk. This will make available greater resources for the private sector in the future which will go into growth investments. Lower inflation also supports consumption as the surplus with people goes up.
Corruption levels are down significantly at top levels. It obviously takes time for this to percolate down. However this makes projects much more viable and improves the efficiency with which projects are executed. As a result of several initiatives on urban renewal projects, renewal energy as well as the focus on the power sector we are slowly seeing a revival of investments. This should lead to a revival of private sector investment cycle as corporate become confident of longer term growth. As I see around me the pace at which the work for the Mumbai Metro has started is unprecedented in the context of Indian Urban Infrastructure projects ex or maybe the Delhi Metro.
Dole out politics of Leftists and Socialists is now out. People would rather earn themselves and spend rather than get dole outs and this is a huge shift in the Indian mindset which will aid economic growth. With a stronger Central Government more reforms will be pushed ahead especially which improve the productivity of Public Sector Enterprises. Demonetization followed by GST, about which I have also written in the past will lead to a slow death of the non taxpaying informal economy and the tax base will move up significantly. This will further improve government finances and aid longer term economic growth.
The importance of the state election results cannot be understated. It is huge for India. The confidence in India will improve, FDI flows will increase and it will be positive over a period of time for India’s rating. This will give the government the opportunity to think even longer term and work on improved growth across segments.
EQUITY MARKET OUTLOOK
The downside risk for Indian equities has receded significantly. In an overall global context where growth is stabilizing, deflationary issues have gone into the background and financial stability risks have reduced India is in a sweet spot. With demonetization hitting the Real Estate sector in a big way with cash moving out of the system combined with lower corruption as well as laws like the Benami Act I expect the real estate prices in India to be flat to lower over the next 10 years. Gold has lost its investment allure and with reporting on cash purchases above a particular level as well as non performance of the asset over the last few years will bring greater flows into financial assets. These combined with better growth prospects, a better productivity in the economy as well as low inflation creates a “Goldilocks” scenario for India over the next few years. Markets will surprise everyone on how they do over the next 3-5 years. This is the time to filter out the noise and not to bother how the next week or the next month will be.
The longer term story is now the best ever I have seen in my 22 year history in the Equity Markets and will remain so for the foreseeable future.