Ashok Wadhwa, Founder & Group CEO, Ambit Group; Prabhat Awasthi, Head of India, Nomura; Udai Kumar, MD & CEO, Metropolitan Stock Exchange of India and Vidhu Shekhar, Country Head, India CFA Institute, feel while Indias macro setup looks strong, there are multiple global headwinds on the horizon, which could threaten the domestic market. They were speaking at the opening plenary of ET Markets Global Summit 2018, which was chaired by Mythili Bhusnurmath, Consulting Editor, ET Now.
Edited excerpts:
Mythili Bhusnurmath: The question of Indian economy being in a goldilocks period keeps coming up time and again. Can we have the goldilocks period stay on in India?
Ashok Wadhwa: If you think about where the economy stands today, we are perhaps in the best situation over the last four years, aided significantly by oil prices, good monsoons and globally benign regimes. Have we leveraged on all these positive factors in a manner so that we can predict superior earning and GDP growth for the next few years? That is still to be tested. So, despite my positive and optimistic attitude, I would say that a lot more has to happen.
For example, let us go back to fiscal prudence. We have compromised a bit on it this year. I still do not know whether the revenue projections, on the back of which, we have predicted a relatively optimistic scenario of fiscal deficit next year, can be achieved. Several other factors are giving us strong indications of inflationary tendencies.
If the government is not able to achieve its revenue target and with some of the new challenges that the public sector banks have thrown up, we do not even know whether the Rs 210,000 crore that was originally budgeted was to be funded off balance sheet. It was obviously not taken into the budgetary exercise because it was all coming off balance sheet but those numbers are now going to be dramatically different. Take away Rs 15000, 20000, 25000 crore — whatever the number is. We do not know how many more will happen and so I would like to believe that whereas there is reason to be positive and optimistic and cautiously optimistic on where the economy and the markets are headed, there factors can derail that growth plan quite easily.
Mythili Bhusnurmath: Of course, that is always true of macroeconomics. There is always an “if” and a “but”. But if I can just throw this question open to the audience at large, how many of you really believe that India is in a sweet spot and it will remain in a sweet spot post 2019?
Ashok Wadhwa: But you should ask people now how many of you believe we would not be and I would like to see that answer…
Mythili Bhusnurmath: That is true. A lot of people are sitting on the fence but certainly you cannot have too many fence sitters. You have to vote one way or the other because come 2019 and you will have an alternative. Prabhat, you consider India is the fastest growing economy and this is something that we take a great deal of pride in. When we talk about the economy, we say we have overtaken China. What is the logic of saying you have overtaken China? It is a far richer economy than us because there may be reasons for that relating to the political system but just because we overtake China or just because we become the fastest growing economy is no great thing. The largest number of poor people living in the world is in our country. Is it that FIIs get more easily taken in by this fastest growing number economy where as Indians, we see it much more closely?
Prabhat Awasthi: From market perspective, growth matters.
The distribution does not??
Prabhat Awasthi: I do not know what you mean by distribution?
Mythili Bhusnurmath: I was just being a little provocative but growth to me has no meaning, unless it percolates down to the lowest strata. Markets and investors look at growth but ultimately in democracy, unless that growth is more equitable, it could completely collapse tomorrow. The country itself in future could be endangered. Are the markets being short sighted when they look only at growth or is distribution also something that they need to keep at the back of their mind?
Prabhat Awasthi: I would argue that you cannot get prosperity even at the bottom of a pyramid without seeing growth. If you look at it historically, and in case look at the data, there is a very strong correlation of stronger growth with the movement of poor into upper strata also and you can see it when you see the real economy. For example, when growth picks up, everything starts growing faster, even the two-wheeler demand starts going faster.
It is not happening just because people are moving up the strata. Now it could be that the rich are getting richer and the relative contrast might be growing higher, but you cannot get incomes increasing at the bottom of the pyramid, if you do not have both. Growth is absolutely essential or you can redistribute that income through a fiscal process which happens in India all the time. Subsidies are there so that fruits of growth can be redistributed through a fiscal process. But without growth, you got nothing.
Ashok Wadhwa: Or taxing capital gains.
Prabhat Awasthi: Yes, whatever…you cannot get anything without growth because revenues would not come if the government would not have any handouts to give because there is top line. Growth is absolutely essential. For markets, it matters because the markets trades on multiples and essentially I am buying earnings over a longer period of time. If I am not growing fast, I am not going to pay that much for those earnings. Thus, growth from market perspective obviously matters. But it matters economically even for incomes. The process you follow you can be intermissionist or without intermission. You can have slower growth but everybody grows when growth comes, that is what I think.
Mythili Bhusnurmath: Vidhu, India has benefited a great deal from globalisation per se but if you are looking at the markets themselves what it benefited really from is essentially liquidity. The unconventional monetary policy that the US Fed and many other central banks follow and which is now coming to an end along with voices being raised against globalisation particularly with Trumps latest salvo. How much support can the Indian economy and the markets in particular, get from global forces?
Vidhu Shekhar: I had a couple of thoughts about what you had asked. Before that, we have a little bit of an unfinished agenda here in the whole goldilocks conversation. The two things that we did not talk about one was banking system reforms.
Our long-term prospects will depend a lot on cleaning up the banks and getting the credit flow going again. By some reckoning, last year the corporate bond market issuances overtook the loans in the bank credit. I do not know whether that is good or bad because there could be story behind that of reducing credit quality and we talked about all those trust relationships within the market.
If you find that we have started failing on the fixed income side, then that could bring a wave of distrust of the markets that pulls the rug from under the feet of enthusiasm that we see now and then feed into other things.
If you do not have the FII flow support, you may yourself like those cartoon characters who run off the cliff and it is after you have gone a little that you realise you are going to fall. So, that possibility is there and I do not know how and what you think about that.
As far as global flows are concerned, we know very well this whole China One Belt One Road has been a big engine of pulling the world along with it and if you remove that, then a lot of the wind goes off the sails. I am not an expert but we are not in the same despondent situation that we were in, may be a couple of years back.
Ashok seems to say that we do not have to depend upon the global growth and so on but if we get our act together, there is so much that India can do in a sense that we can compete better in the global markets, we can sell in the global markets and we can reduce, we can get out of the situation where we were dependent on oil. Competitiveness can improve over a period of time.
Mythili Bhusnurmath: The fact that so many domestic investors have come in to the stock market, particularly through the mutual fund route, means there is a certain sustainability to the stock market momentum, which was not there may be even 10 years ago. Every time, FIIs lost faith in India, the markets used to really collapse with repercussions for the currency markets. This is certainly a positive. But tomorrow, if the stock markets are really to tank and small investors were to lose big time, would the government and Sebi be able to sit quiet? Will they be able to take the political flag as Sebi itself has cautioned investors?
Udai Kumar: Through mutual funds, lots of money is coming to equity markets and that is what is fuelling the rise in the indices. Regulators were worried when markets were zooming and now that there is a correction, they are probably feeling a little relieved. Whenever there is a rise, there is a hard mentality and people want to take advantage of that in the market and since they feel it is very risky, at least that realisation is there on the public side that do not go to the market directly but go through the mutual funds route.
But that is also a risky idea and people are coming to realise that. Some sort of sanity has to prevail in the market and obviously regulators cannot keep quiet. I have seen from very close quarters that they are worried and they want to do something. You must have heard about disparity between cash market and the F&O market. The F&O market being speculative, the size is very big and some steps are being planned to bring some sort of balance. The regulator is talking about lots of things and they cannot remain quiet.
Mythili Bhusnurmath: What is running up? When we say our market is overvalued, it is all a question of function of time. How many of you really believe in this audience? Should regulators worry about the level of the markets or should they worry about volatility?
Ashok Wadhwa: Just one point. You touched upon very important issues. You asked a question to say what if retail investor puts all his money and loses all his money? All of us in different capacities are advisors to families, high net worth individuals (HNIs), from time to time. The first point of caution that we share with everybody is beware of this misselling, beware of greed.
Greed always has bad consequences. Beware of greed at all points of time. One of my panel colleagues spoke about the corporate bond market and why it has gone up. I would say to all my friends and people in the retail market that we should start looking at mutual funds and start thinking and evaluating the underlying asset portfolio.
Mythili Bhusnurmath: But Ashok, we are talking about financial literacy in a country where even ordinary literacy is barely 60%! If you look at the studies of an ASER (Annual Status of Education Report), they will tell you that even III standard, IV standard children cannot read A, B, C or Ka, kha, Gha.
Ashok Wadhwa: Fortunately, only 2% of our retail investors invest in the market. I would like to believe from a perspective of caution that it is 2% out of the 60% and not the 2% out of the balance 40%.
Prabhat Awasthi: This is very clear from where the collections of mutual funds come because they come from very few centres. It is not as widespread as you would believe by looking at the numbers themselves.
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