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Unless India resolves its own issues, markets will not rally

Vibhav Kapoor / 23 Jul 12 | 12:57 AM

The Indian equity markets have been passing through an uncertain phase for 15-18 months. This is largely a subset of the global economic problem, which manifested itself through the US financial and banking crisis in 2008-09 and caused a global economic recession.

There is no doubt that a significant part of the blame for this flux falls squarely on the shoulders of India. The lack of urgency to address structural problems has led to a severe lack of confidence in the economy’s health, both in the domestic business community and among global investors.

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The global problems are well documented and largely revolve around the European problem. However, in recent weeks, the negative fallout of Europe seems to be manifesting in a global economic slowdown, beginning to impact the US, China and the emerging economies. The huge political changes impending in the US and China towards end-2012 is adding to this uncertainty. The inability of the US polity to reach an understanding on the so-called ‘fiscal cliff’ could lead to fairly serious consequence for the global economy in 2013.

Given such an uncertain global situation, it is imperative that India puts its house in order, so that its economy is able to withstand these global pressures and continue to grow at an acceptable rate of at least over seven per cent per annum. Unfortunately, as of now this seems a difficult proposition. The country is saddled with a slowing economy, high inflation and interest rates. The Reserve Bank of India has repeatedly said it is averse to loosening monetary policy (and rightly so), unless the government takes care of the ballooning fiscal deficit. India faces a serious threat of international downgrades in a few months if it does not show a serious intention to control its deficit.

Besides, there are serious concerns on the longer-term structural health of the economy, due to the inability of the government and other political parties to arrive at a consensus on long-pending reforms, such as opening the economy further to attract foreign investments.

For now, a serious shortfall in the monsoon rains is beginning to be a new area of concern. This could reduce the rate of growth further, as well as spike up inflation. This could lead to a slowdown in the rural sector, which has fared reasonably well. As a result, the fiscal health of the government could deteriorate.

In the corporate sector, profit growth has slowed from the heady days of 2003-07. Consensus expectations now range at 7-10 per cent for FY2013-14. On the positive side, valuations are reasonable, though not very cheap, given the dangers ahead.

Given these circumstances, the Nifty appears stuck in the range of 4,800-5,400 for the next few months. A significant deterioration in Indian condition, or a breakdown in the global economy would entail dangers of a further downside to the market. A sustainable bull market is only possible if India takes strong measures to improve its fiscal health, carry through economic reforms and solve project execution problems. Without these, we would be buffeted along by global macro factors.


The author is group chief investment officer, IL&FS Limited

Sensex

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Cipla491.903.79
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B H E L230.601.47

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Comments

    23 Jul 12 at 11:24 AM
By: LAKSHMINARASIMHAN

True. Unless the fiscal deficit narrows the revival is certainly impossible.