Government must focus on reforms soon, like autos: Ambit Cap
Dated 14th October, 2014
Investors are currently awaiting the Maharashtra and Haryana state election results on the assumption that once this event is out of the way, the Prime Minister will finally settle down and look at administration changes and reforms, says Saurabh Mukherjea, chief executive officer, Institutional Equities at Ambit Capital. Speaking to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, Mukherjea says the economy continues to be soft and no infra project has taken off significantly.
Speaking to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, Mukherjea says the economy continues to be soft and no infra project has taken off significantly.
“We need reforms to come in soon now. Also the next Budget will be very critical for the market as the July Budget was a damp squib. The government should be able to convey its focus on fiscal discipline come what may,” he says. The areas, Mukherjea says, that need attention to are: labour reforms, land reforms and goods and services tax (GST).
On the market-front, Mukherjea says the market will pick up pace only if reform momentum kicks off and adds that he isn’t too worried about global slowdown. He has a year-end target of 30000 on the Sensex with a 10 percent downside risk if the policy reforms don’t come in.
On sectoral plays, Mukherjea like autos and auto ancillaries.
Latha: What is the overall sense you are getting about the Indian markets ? Two major contradicting forces, one our macros are getting reset for the better but will the liquidity flow, is the risk appetite now veining ?
A: The main thing investors are focusing on, firstly, is the election results on Sunday- October 19 and thereafter, most of us are really keeping our fingers crossed that in the six-seven weeks after the Maharashtra and Haryana elections, the Prime Minister will finally settle down in office in Delhi and will start seeing administrative reforms.
Honestly whilst last four-five months have been a great profile-raiser, sentiment booster for India, in terms of reforms on the ground, reforms in parliament, we haven’t actually seen that much.
So once the results are out of the way, thereafter we are looking at four-six weeks of flurry of governmental activity in New Delhi which will actually give some substance to the rally that we have seen over the last 12 months.
Latha: Unless that happens you won’t be a buyer ?
A: I think the concerns regarding FY16 growth will become a little more accentuated unless we start seeing some movement on the ground in terms of policy. I remember we haven’t seen any infrastructure project of note take-off in the last five months.
It is not as if the IIP data is roaring away, neither is credit creation rocking. So, there are multiple grounds for believing that the economy is still very soft and without reform, the economic growth rate isn’t going to pickup very quickly. So, this year’s growth of around 5.5 percent is alright. The question is, can we get towards 6.5 percent in 2016, that is a pretty big question mark and that is what will drive markets from November, December onwards.
Sonia: What are the legislative reforms that will keep the market happy ? People are talking about GST, land acquisition etc but if you had to list down two-three reforms that the government should get to right now, what will they be ?
A: What is clear is that this Budget will be a big event. The July 10 Budget didn’t deliver by any stretch of imagination regardless of what hoopla followed in its aftermath. That was a damp squib but one has to be fair to the government that they had barely been in power for six weeks at that point. Therefore, the February Budget becomes an important event.
The critical thing we will be looking for is fiscal discipline and a restatement of the Fiscal Responsibility and Budget Management (FRBM). Can we go back to a Fiscal Responsibility Act which will give investors confidence that India will stick to the road of fiscal discipline come what may ?
Leaving the Budget aside, labour reforms, land reforms, GST, these are the three big headers that we are looking at. Labour reforms, the industrial disputes act in particular. What is giving us grounds for hope is government has already said that there will be an amendment in the Small Factories Act, the amendment will be tabled in the winter session but the Industrial Dispute Act is the big one. And will the government be able to table that in January, February ?
Land acquisition act amendment for that because as you know pretty much all acquisition activities ground to halt in India over the last 12 months. Finally GST, we need the constitutional amendment, we need more progress on drafting, we need the states to sign up. So plenty of work left to be done and that is why post October 19 we really are keen to see this government settle down in office and get its foot on the table and start moving on the reform front.
Latha: Morgan Stanley’s recent report says that there is a lot of executive decision making that is happening in terms of clearances as well inflation, they are pinning their hopes on the fact that this trajectory will continue and at that time the inflation number had not even come out for September. Purely because the macros are correcting and because executive implementation is happening at a ground level, even we heard about the NREGS tweaking as well. So their argument is that even without land, labour and they specifically mentioned these acts, even without land labour and GST, 6.5 percent is a given for FY16, you are not buying that ?
A: I would love to believe that point of view, it is just that the visits that I have made to Delhi over the last three-four months don’t suggest a flurry of executive activity. There is a lot of activity going on but whether it constitutes administrative reform I am not so sure. So if you take for example the whole situation around power purchase agreements (PPAs) which are stuck, I don’t think that has changed materially. If you take the Discoms balance sheets, I don’t think that has changed materially. I could go on and on about none legislative issues which are still hanging fire.
On the general inflation point I think we will be helped by base effects in Q3 but Q4 it is pretty clear that the base effects will roar back in an opposite direction and we will be back with 8 percent inflation, CPI 8 percent in Q4.
Remember falling crude really doesn’t have that much of bearing on CPI, barely 10 percent of CPI is driven by falling crude. So with RBI itself saying that its January 2016 6 percent target still looks bit difficult to reach, I think tight monetary policy is a given for the rest of the fiscal. So that really cannot support growth so growth therefore has to be sustained by initiative from Delhi which hasn’t yet materialised to the extent that we were hoping.
Sonia: On the other hand there is this overarching worry about the global slowdown that could derail our markets as well. How worried would you be about a global weakness denting FII demand in India ?
A: I am less worried about that for a couple of reasons. If one takes the US economy which really is the main stay of the global economy, that seems to be in pretty solid shape. Yes, there is a weakness in China but there has been weakness in China for the last four years, there has been weakness in Europe but what is new there.
So, a sustained fall in commodity prices will have a negative effect on India because that will lead to the whole capital goods environment globally turning very adverse which will, in turn, have a bearing on India’s exports. However, if commodity prices stay broadly where they are, the US continues recovering, even with the Fed tightening I am not that worried about the global outlook for India.
India is in the midst of a slow macro economic recovery, with some policy initiative that can be given a bit of thrust. Monetary policy will stay tight because inflation still persists an issue but overall the macro backdrop is pretty solid, the fiscal position looks better than it has for at least four years and I don’t think macro really is the key source of concern.
At the moment what our clients are looking at is can we see some reform activity which gives us courage and hope about 2016, that 6.5 percent number for 2016 I don’t think is a given and that is where I think a lot of investor attention focuses on.
(This interview was published on Oct 14, 2014 in moneycontrol.com)