The bad things are easier to believe. Haven’t you noticed
that?
-Vivian to Edward in movie Pretty Woman
While it is easy and fashionable to highlight the negatives to
support the fear already instilled amongst the investors, I believe it would be
in order to take note of the improvements that have taken place in recent times
which would support the markets on their upward journey, whenever it begins.
1. The current account
deficit of India has shrinked to ~1% of GDP for 9MFY20 vs. 2.1% of GDP in FY19.
The recent fall in current account deficit is primarily due to
fall in imports due to poor domestic demand and sharp correction in energy
prices (crude oil & natural gas). Fall in imports due to fall in domestic
demand may not be a desirable way of lowering the current account deficit.
Nonetheless, the breakdown of global energy cartel indicates that the lower
energy prices may sustain for little longer, helping the recovery of Indian
economy in 2HFY21 onwards. In the interim it has cushioned the currency against
bulky FPI outflows and provided additional levers to RBI for managing monetary
policy to support growth.
Net FDI in 9MFY20 was 2.7% of GDP, which was sufficient to cover
the CAD and keep the balance of payment at comfortable level.
2. The asset prices
(equity, debt, and precious metals) have corrected materially. The froth that
had got built in the valuations has been mostly wiped off. A further correction
from the present level will make the valuations attractive again for buying.
3. The corporate rate cut
announced last summer is finally beginning to show some impact. Companies like
Hindustan Unilever and Bosch have announced fresh capex by forming 100% subsidiaries
to take advantage of lower tax rate of 15% for new businesses. Hopefully, we
shall see many more companies following the lead and making fresh investment to
build new capacities.
4. The global central
banks have embarked upon a massive monetary easing program, just like in the
aftermath of global financial crisis. The interest rates in US are now close to
zero. There are indications that US and many European countries may embark on
massive fiscal easing also. This shall eventually inundate the global market
with cheap money. Once the fear of COVID-19 subside, a part of this cheap
liquidity will certainly flow to the emerging markets like India in search of
yield. We shall see the asset prices reflating again this summer, in my view.
5. The mobility
restrictions due to the efforts for containment of the spread of COVID-19 have
resulted in several households cancelling discretionary consumption like
avoidable travel, foreign vacations, parties etc. This could have positive
impact on the domestic private saving rate that had been on the decline for
past many years. It is too early to assess whether the savings will be notional
or material. But nonetheless, one could hope that these savings will be
material and may be used for acquiring assets.
I hear lots of people restricted from foreign travel are
planning domestic vacations. I also hope that this provides a great impetus to
domestic tourism. Unfortunately, the government is not making enough efforts to
make it a sustainable trend.
