Vijay Kumar Gaba

The first half of the current fiscal (1HFY20) is almost over. On the domestic front, the past six months have been quite eventful for the country in general, and the economy & financial markets in particular.

Politically, the six month period witnessed the PM Modi led NDA returning to power with unexpectedly strong majority. Continuing with the tradition of unpredictable policy responses, the government has rewritten the rules for engagement with Pakistan and China by abrogating the controversial Article 370 of the constitution. Besides, a definitive move has been made towards implementing a uniform civil code by outlawing the practice of triple talaq (The right of men to divorce their wives instantly through oral or text communication) prevalent amongst Indian Muslims. A long standing dispute over the construction of Sri Ram Temple in Ayodhya has been fast tracked and a final Supreme Court Verdict on the dispute is expected in next 2 months.

These developments have removed some splinters that have been hurting the toe of Mother India for many decades. The procedure to remove the splinters is painful and full recovery may take some time. Nonetheless, if proper care is taken to heal the wound without letting the infection to spread, it will be a major relief for the country in medium to long term.

Economically, the growth continued to decelerate to lowest since global financial crisis. More and more sectors joined the class of slowdown. Three noteworthy events have taken place. The inflation is persisting at the lowest levels in a decade and manufacturing growth has almost stalled. Accordingly, tax collections have fallen much short of the budgeted targets weighing on the fiscal balance.

Firstly, the concept of Universal Basic Income (UBI) has been introduced to supplement the rural job guarantee (MNREGA) that was in place for past one decade.

Secondly, the process to restructure the scheme of income tax has been initiated with restructuring of the corporate tax. The process of simplifying and streamlining of GST has also gathered pace with further consolidation of slabs and classifications. A simplified GST and Corporate Tax structure shall provide a strong foundation for reorganization of Indian enterprises. Eventually, we may see large consumer facing businesses adequately supported by a vast network of smaller feed suppliers, contract manufacturers and service providers etc.

Thirdly, the process of bank consolidation has accelerated with on the tap licensing for smaller banks. This shall straighten the structure of Indian financial system that got distorted post demise of development financial institutions two decades ago. Two separate financing verticals one to finance the growth (infrastructure, projects and corporate) and the other to finance consumer and ensure financial inclusion shall get established in due course of time, of course with some overlap.

Financially, 1QFY20 was one of the weakest quarters in past 8yrs insofar as the corporate earnings are concerned. The asset quality remained under pressure with many some new areas of stress emerging. The household debt levels have increased while corporate have deleveraged.

RBI continued to ease monetary policy with rate cuts and liquidity infusion. The policy stance was changed to "accommodative" from "calibrated tightening" earlier.

The logjam between NCLT and Judiciary continued to plague the process of resolution of stressed assets under IBC.

Financial Markets have been volatile. The benchmark stock market indices are little changed from their six month ago levels, thanks mainly to the massive rally in past few day. INR is weaker by couple of percentage points due to 60bps fall in benchmark yields and FPI outflows.

Tomorrow, I shall present my current investment strategy and market outlook.