“Kaya lag raha hai?” (How is it looking?) I am sure most of the financial market participants must be overwhelmed by this question in the past week. Obviously there is no accurate answer to this question in the present uncertain and volatile times. Regardless, every market participant is trying to answer this inquisition to the best of their ability and understanding of the situation. As the situation is still evolving and new complexities are getting added with each passing day, it is natural that the answers to this question will keep changing every day, and sometimes even within the same day.
If I have to answer this question as someone who is an independent observer of the markets, I would prefer to take a myopic view of the market rather than getting influenced by the hourly news flow. Also, I would mostly remain focused on the Indian markets, as my lenses do not show me the long distance view. For example, I am incapable of commenting on the likely effect of the Russia-Ukraine conflict on US and European economies and geopolitics.
In my view, presently the stars are stacked against the Indian economy and therefore markets. It will take a very strong political will, economic acumen and divine help for us to get out of this situation.
The perfect storm developing
India’s tax to GDP Ratio is the same as 2007 level, i.e., no improvement in the past 15years. However, the Interest Payments to GDP has grown by more than one third from 5% to 6.5% of GDP. As per FY23BE, the central government will be spending more than 20% of its budget only on interest payment. Obviously, the budget for development, social sector spending and subsidies is contracting. Given the elevated inflation and negative real yield on savings; higher indirect tax burden on middle and lower middle class, and lower social sector spending/cash payouts – the consumption has been hit. There is nothing to suggest that there could be any reversal in this situation anytime soon.
To make the matter worse, the government is faced by this global geopolitical crisis. Russia and Ukraine are not only large suppliers of oil & gas, but also edible oils. A substantial part of India’s edible oil import also comes from these two countries. A blockage in the supply chain (due to war or sanctions) could lead to material rise in edible oil inflation, further hurting the common man.
The market price of transportation fuel and cooking gas has not been revised since November, apparently to suit the political convenience. Natural Gas and Crude oil prices have risen substantially since. Strict sanctions on Russia may cause further sharp up moves in global energy prices. This is a Catch-22 type situation for India. If the government decides to fully pass on the crude prices to consumers, inflation may see a sharp spike and consumption demand may collapse further. On the other hand, if the government decides to take a hit on fiscal, the deficit, borrowings and interest burden will rise substantially over the budget estimates. This will happen when the non-tax receipts from disinvestment etc. may not materialize and revenue expense may rise due to dearness allowance etc. Obviously the primary premise of the budget, i.e, sharp rise in capital expenditure will collapse. The global agencies will put sovereign rating under review, making cost of borrowing even higher. Financial stress may rise, abruptly ending the asset quality improvement cycle for banks.
This all might keep FPIs motivated to continue dumping Indian equities and debt, pressuring the current account and INR.
Higher inflation, lower incomes, weaker INR and higher cost of capital - this all is plausible together for some time.
How would you make a case for investment under these circumstances?
I do not accord much significance to the aggravating Russia-Ukraine conflict. My understanding is that this conflict has been persisting at least since the disintegration of the former USSR. The hostilities had deepened in 2014 when Russia annexed Crimea, one of the key Ukrainian provinces. I believe either Ukrainian president Volodymyr Zelenskyy would resign and a Russia friendly president would be installed in Ukraine; or the local conflict would continue with Russia and NATO supporting the opposite factions with money and arms for years, as has been the case with Afghanistan. I also feel that any sanctions imposed on Russia would remain ineffective as has been the case in the past five decades. The over dependence of Europe on Russian energy, metals, wheat and minerals supply makes these sanctions unviable for Europe at least.
My premise is that the situation for the Indian economy was bothersome even before this geopolitical issue aggravated in past three weeks. This conflict has only added a couple of new dimensions to the problem.
So to answer the primary question – “Abhi toh achha nahin lag raha hai” (For now at least it is not looking good).
The follow up question could be kya karna hai? Or Su karva nu? Or What to do?
Will address this question next week.
No comments:
Post a Comment