Vijay Kumar Gaba

 The markets have been in a punishing mood for the past couple of weeks. Especially after the “path breaking budget”, the markets seem to be adjusting to the RBI’s rather tepid growth forecast for 2HFY23. Obviously, the RBI does not share the enthusiasm of the government over public sector capex triggering a virtuous cycle of growth led by private sector investment.

The narrative of geopolitics (Russia-Ukraine conflict) and Fed tightening scaring the markets does not sound credible.

Russia and Ukraine have been at war for three decades, since the dismantling of the USSR. Eight year ago, in 2014 Russia annexed one of the larger provinces of Ukraine (Crimea) and markets have not cared much about that, just like it has learned to live with the perennial conflicts between Israel and Philistine; US and Iran, South Korea and North Korea, India and Pakistan; etc.

The US Federal Reserve started winding up its asset buying program (QE) last year and announced its intent to hike policy rates once QE ends in March 2022. There is no surprise for markets in this. There is overwhelming empirical evidence to suggest that Fed rate hikes that control inflation but do not hurt the growth have been usually benevolent for equity markets, especially emerging markets. The most hawkish forecasts are projecting the Fed policy rates to peak at much lower levels as compared to previous rate cycles. Building a disastrous outcome for markets like the 1980s or 2000 due to Fed rates may be inappropriate since in those cases rates peaked at 20% and 6% respectively, as against 3.5% worst forecast this time.

The argument of money debasement and hence rates peaking at lower level is actually favorable for equities, since it allows higher valuations to sustain for longer.

Another popular narrative on the street is that the ongoing correction may be a great opportunity to buy. Millions of experts on social media are saying with the benefit of hindsight that all such corrections in the past were great investment opportunities which people regretted later.

I see their point, but would like to understand where we stand in the current market cycle? If the current market is not complete yet, we may experience material pain in the coming months. In the past two market cycles (2006-2009 and 2016-2020), the market had given up most of its gain towards the end. In fact, the smallcap indices ended both the cycle with net losses. In the current cycle we are close to 10% off from highs recorded so far in the cycle. Both Nifty50 and Nifty Midcap are more than 100% higher from the starting point whereas Nifty Smallcap is 200% higher from the starting point. Never have the market cycles have ended like this.

We certainly have a long way to go in this market cycle. If the peak has already been recorded, we may see 25-50% correction in broader markets; else we may have some distance to move north. More on this tomorrow.

The Reserve Bank of India (RBI) made its last policy statement for the current fiscal year FY22. The statement is unambiguous on all four key issues:

1.    The inflation is likely to peak in the current quarter and fall to the RBI’s tolerance range from next quarter onward.

2.    The overall growth has recovered to the pre-pandemic level, but private consumption is lagging. The risks to the growth are on the downside and 2HFY23 growth should moderate to ~4.5%.

3.    The Monetary Policy Committee (MPC) is unanimously of the view that in view of the present growth vs inflation dynamics, there no case for a hike in the policy rates.

4.    The growth recovery is fragile and requires monetary policy support. Hence, MPC has decided to keep the policy stance accommodative by a majority vote of 5 to 1, as was the case in the previous two policy statements.

This accommodative stance of the RBI in total defiance of the global trend of monetary tightening led by inflation concerns is not surprising, given the fact that the RBI has been solely focused on growth for past 3years, since the incumbent governor has assumed the office.  In the post meeting press interaction also the governor and his deputy sounded calm, defiant and confident.

Obviously, the RBI knows much more than most of the market participants and commentators and is certainly in a much better position to decide the best course of action. From the policy statement and officials’ replies to the press it appears that RBI is relying significantly on (i) the outcome of the monetary tightening by global central bankers and consequent cooling down in global inflation; (ii) a favorable monsoon; and (iii) full success of government’s plan to catapult private capex and consequent pickup in private consumption. The RBI also appears to be assuming that “India’s inflation” is different from the “global inflation”, and it will ease without any monetary policy intervention.

The argumentative Indian in me is restless to explore between the lines and find what has not been said and what could wrong. I am sure a trader who takes the governor’s statement at face value and places his bets accordingly would make more money than someone doubting the words of the governor and taking a deep dive to explore the words that were not said.

Citing the first part of a verse from famous Shailendra song from Movie Guide raises suspicion whether the governor is gambling with Knightian Uncertainty. He only mentioned “Aaj phir jeene ki tammna hai (Today I wish to live again), signifying strong survival instinct. What he did not say was ‘Aaj phir marne ka irada hai (…even if I have to die for it today) signifying the willingness to take high risk.

Regardless, I would like to argue that the RBI is worried about—

·         A prolonged growth recession. 2HFY23 growth projection of below 5% is not in consonance with the projection made by the Economic Survey and professional forecasters.

·         Rise in cost of borrowing for government and consequent interest burden on the budget.

By completely side stepping the large borrowing program of the central government in the policy statement, the RBI has opened the doors to the speculation of a significant balance sheet expansion (QE in simple words). The reliance on foreign funds for financing the deficit is also seems high, implying that RBI is expecting the yield differential between developed market bonds and Indian bonds to remain attractive and also inclusion of Indian bonds in global indices.

The RBI has categorically accepted the subordinate role of monetary policy to the fiscal policy; though the statement claims “equality” of two policies.

Both the government and the RBI might be hoping and praying that Russia-Ukraine conflict is averted; US and China growth cools down and OPEC+ agrees to increase the oil production materially so that the global energy prices cool down materially. Else, the government may be forced to take the incremental fuel prices on its fiscal account, either by way of duty cuts or subsidy to the OMCs. This not only takes the BPCL disinvestment off from the table, but also brings a downgrade of India’s sovereign rating in the frame.

Notwithstanding, what the RBI statement reads, the inflation projection chart of the RBI is sufficient to raise suspicion. From 0 to 8% inflation range would render any forecasting method meaningless. It is reasonable to suspect that “hope” is one of the horses pulling the policy cart.

The steep yield curve that allows short term borrowing at 3.75-4% vs long term borrowing at 68% to 7% .This is obviously encouraging borrowers to borrow more through short term instruments. The risk of ALM mismatch that played havoc with non-bank lenders and real estate developers in recent past is thus increasing. By not doing anything to flatten the yield curve, the RBI perhaps has stretched its luck little too far.

Last but not the least, “staying put” is the best strategy when in doubt. The complete status quo in the RBI policy, when the things have changed so much since the last policy statement, signals a banker in doubt and not a confident policy maker as the governor has pretended to be.

The Monetary Policy Committee of the RBI has been consistently facing the growth vs inflation challenge for past three years at least. However, the conditions have become significantly more challenging and complicated for the MPC in the recent months. Hence, in the past couple days MPC may not have spent much time on resolving the growth vs inflation conundrum.

 In the latest union budget presentation, the finance minister placed special emphasis on the need to encourage private sector investment. The finance minister highlighted that catalyzing (crowding-in) private sector investments through public capital expenditure is one of the key goals of the government in its endeavor to attain its long term vision “India at 100”.

 The Capex conundrum

One of the most praised features of the Union Budget for FY23 presented last week is the emphasis on capital expenditure. The government, industrialists, bankers and many market participants have highlighted that the sharp rise in allocation for capital expenditure in the budget shall catapult the economy into a higher growth orbit and accelerate the employment generation.

Incidentally, the allocation for capital expenditure in the budget is also one of the most criticized items. Experts have highlighted that the higher allocation for capital expenditure in the budget is not only an optical illusion but may also be misdirected as it is mostly focused on the transportation sector and defense and completely ignores priority sectors like tourism, food processing, bio technology, higher education, sports & youth affairs, etc. The opaqueness in the matters of capital expenditure also raises doubts over the government's commitment to transparency in accounting.

What the finance minister said

In her budget speech, the finance minister gave an impression that the allocation for the capital expenditure in the union budget for FY23BE is being sharply increased to 2.9% of GDP.  This is an increase of 35.4% over FY22 and more than 2.2x the allocation for FY20. She also emphasized that investment taken together with the provision made for creation of capital assets through Grants-in-Aid to States, the ‘Effective Capital Expenditure’ of the Central Government will be 4.1% of GDP.

“…the outlay for capital expenditure in the Union Budget is once again being stepped up sharply by 35.4 per cent from Rs5.54 lakh crore in the current year to Rs7.50 lakh crore in 2022-23. This has increased to more than 2.2 times the expenditure of 2019-20. This outlay in 2022-23 will be 2.9 per cent of GDP.

With this investment taken together with the provision made for creation of capital assets through Grants-in-Aid to States, the ‘Effective Capital Expenditure’ of the Central Government is estimated at ` 10.68 lakh crore in 2022-23, which will be about 4.1 per cent of GDP.”

What budget documents says

Actual FY23BE capital expenditure provision is hardly any growth over FY22RE

The total capital expenditure of the central government includes four components – (1) Capital expenditure by central government department and ministries; (2) transfer to states for centrally sponsored schemes; (3)Loans to states; and (4) capital expenditure by the public sector enterprises through internal accrual, borrowings and budgetary support.

As per budget documents, the FY22BE provided Rs11.37trn for capital expenditure. As per FY22RE, the capital expenditure was lower at Rs11.05trn, as PSEs capital expenditure was revised down from Rs5.82trn (BE) to Rs5.02trn (RE) , a shortfall of Rs800bn.

Besides, the provision for transfer (Loans) to the state governments has been increased by Rs916bn from Rs218.18bn in FY22RE to Rs1.134trn in FY23BE.  It is pertinent to note that the state governments are allowed to borrow from the markets upto 4% of their respective state’s GDP. In past decade it had been a practice for state governments to borrow from the market and the central government’s loans were limited to very specific purposes.

Adjusted for loans to states, FY22RE capital expenditure is Rs10.83trn. This has been increased to Rs11.06trn, an increase of 2.1% only.

Transportation, Defense, BSNL 5G account for almost 72% of proposes capex

FY23BE provides 43.3% for transportation (Railways, Roads and Highways); 21.4% for Defense and 7.2% (mostly BSNL for 5G roll out).

As the former finance secretary Mr. S. C. Garg, highlighted in FY22 NHAI incurred a capex of Rs1.22trn in FY22. This investment was funded by Rs573.5bn budgetary support and Rs650bn borrowing and other resources raised by NHAI. FY23BE provides Rs1.34trn for NHAI. This means the government has substituted NHAI’s borrowings for capital expenditure. Thus, while the government account depict Rs636bn higher capex on roads in FY23BE, in fact the rise in actual capex may only be Rs120bn over FY22.

Besides, FY22BE provided Rs141.15bn for BSNL capex. However, FY22RE shows that the government did not provide any assistance for BSNL. FY23BE provides for Rs447.2bn for BSNL capex, the entire amount. This means like NHAI, BSNL may also be finding it hard to raise resources for their capex.

The green bonds proposed in the budget are primarily borrowings for PSEs like NHPC, NTPC, IREDA etc. to fund green energy projects. Earlier these entities used to borrow on their own books.

Given that there has been hardly any private capex in the roads sector in the past 7yrs, and now NHAI becoming dependent on the central government for all its capex, the quality of overall capex is likely to deteriorate only. The fall in overall PSE capex and failure of the government in disinvesting these PSEs is going to be a major challenge for the government.

Key sectors get nothing for capex

The finance minister said in her speech “For farmers to adopt suitable varieties of fruits and vegetables, and to use appropriate production and harvesting techniques, our government will provide a comprehensive package with participation of state governments.”

The budget allocation for capex on Food Processing is Rs ZERO.

Tourism has been one of the favorite sectors of our prime minister for growth and generating employment.

The budget allocation for capex on the tourism sector is Rs ZERO.

The finance minister said in her speech, “Implementation of the Ken-Betwa Link Project, at an estimated cost of ` 44,605 crore will be taken up. This is aimed at providing irrigation benefits to 9.08 lakh hectare of farmers’ lands, drinking water supply for 62 lakh people, 103 MW of Hydro, and 27 MW of solar power. Allocations of `4,300crore in RE 2021-22 and `1,400crore in 2022-23 have been made for this project.”

The budget allocation for Jal Shakti ministry is merely Rs4.2bn. This includes allocation for the ambitious Nal se Jal (Tap Water) program.

Electronics & IT (Rs3.9bn); Science & technology (Rs0.95bn); Agriculture (Rs0.4bn); Education (Rs 0.18bn); Renewable Energy (Rs0.12bn)  Sports (Rs0.05bn); etc. are some of the departments that get paltry allocations contrary to the government’s stated priorities.

Obviously markets are regretting their instant reactions to the budget.

 

While the equity markets have generally welcomed the Union Budget for FY23, the bond market seems to be majorly disappointed. It may be pertinent to note that the government bond yields had started rising in December 2021 itself, even though the April-October 2021 deficit numbers were very encouraging; and the RBI had categorically assured that the policy stance will continue to be “growth supportive” irrespective of the rising price pressures.

YTD 2022, the benchmark 10yr yield has seen a sharp surge, rising over 55bps. With this the benchmark yields are higher by 100bps from 2020 lows. The higher yields have however not transmitted to the lending rates.

Perfect storm in the bond street

A perfect storm seems to be developing in the Indian bond market.

·         The net government market borrowings are most likely to stay elevated in the midterm as fiscal consolidation is expected to take longer than previously estimated.

·         The inflation is persistently hitting the upper bound of the RBI tolerance range. The Monetary Policy Committee (MPC) of the RBI is widely expected to yield to the pressure of staying close to the curve and begin hiking the rates.

·         The US Fed has already announced the pathway to normalize the near zero interest rates. Besides, the US fed has also announced termination of Covid related quantitative easing (QE) program by March 2022. This could impact the global demand for emerging market bonds

·         The domestic household savings are continuing to slow down, forcing the government to reduce its reliance on small savings funds for deficit financing.

·         The banks are anticipating acceleration in credit growth, shrinking the pool available for bond buying.

·         The RBI has already started unwinding the excess liquidity infused in the system to complement the government’s Covid relief measures.

The ambitious capital expenditure plan of the government would need to be evaluated against a rising rate environment; especially when it largely hinges on the private sector participation in capacity building.

Historically, bond yields had a good negative correlation with the equity returns. The correlation has been much stronger in case of broader markets. It would be interesting to see how things unfold in the coming months.

After struggling to understand the economic survey and budget documents for more than 36hours, I have concluded that at least in matters of government, ignorance is actually bliss.

In my view, a presentation that makes overwhelming use of technical jargon, complicated arguments, and statistical manipulation, usually implies lack of conviction in the presenter. Moreover, a presentation which does not take into consideration the comprehension level and linguistic abilities of its audience is a futile exercise. Usually such presentations are the outcome of either poor communication skills of the presenter; or mala fide intent of the presenter. Presenters tactically overuse technical jargon and complicated arguments to overwhelm the audience so that they could be distracted from noticing the shortcomings.

In my view, the latest budget and economic survey are clear cases of poor communication. They follow the principle of “Form over Substance”, as these conceal more than what they reveal. I would not go to the extent of terming it a case of mala fide intent, but there is definitely incongruence and lack of conviction on many counts.

In her speech, the finance minister used a lot of jargon like “digital economy”, “Fintech”, “Technology enabled development”, “energy transition”, “Unified Logistics Interface Platform”, “Chemical-free Natural Farming” “G2C, B2C and B2B services”, “Drone as a service (DaaS), “Battery as a Service (BaaS), “Design Linked Manufacturing (DLM)”, “Blockchain”, “Digital Banking Units”, “Deep-Tech”, etc., The audience for her budget speech is supposed to be the members of parliament and 140crore Indians. I am sure a large majority of this audience (including many of her cabinet colleagues) does not understand this jargon. Obviously, the economic survey and budget presentation has been prepared by “professional type” managers engaged by the government, who may be totally disconnected from the ground realities.

Goal incongruence

There are some glaring examples of goal incongruence in the budget. For example, climate change, energy transition, clean energy etc. have been cited as core tenets of new development paradigm. However, using ethanol produced from sugarcane, running electric vehicles on batteries charged with thermal power, and burning biomass pellets with coal in thermal plants do not concur with this tenet. It is widely acknowledged that sugarcane is one of the most water intensive crops. Admittedly, water in India is highly energy intensive. Ethanol extracted from sugarcane produced using water pumped through diesel pump sets is not exactly clean fuel and it certainly does not help in climate change efforts.

The finance minister said that “five to seven per cent biomass pellets will be co-fired in thermal power plants resulting in CO2 savings of 38 MMT annually.” The research however shows that biomass burning in power plants emits 150% the CO2 of coal, and 300 – 400% the CO2 of natural gas, per unit energy produced. (see here)

The finance minister stated that “The animation, visual effects, gaming, and comic (AVGC) sector offers immense potential to employ youth”. Only a few years ago the government had banned some AVGC Apps arguing that these are misleading the youth of the country. Many organs of the government and the Political party of FM vehemently argue that social media is distracting the youth of the country from the right path. How does she reconcile these two? If there is recognition within the government that social media is now integral to the economy, then the first step should have been to lift the ban from TikTok.

Bothering about Sunday feast

This is Tuesday afternoon and Children of the household are uncertain about getting the evening meal. The finance minister is asking the children to make merry because she will be hosting a gala dinner on Sunday.

Millions of Indian youth who are looking for employment cannot wait through the Amrutkaal to get jobs. They needed it yesterday. The government managers need to understand that if an engineering graduate does not get a job within 6months of his passing out, the chances of his getting a suitable job for the rest of his life reduce materially, because he has to then compete with the fresher graduates.

The finance minister emphasised that “Our government constantly strives to provide the necessary ecosystem for the middle classes – a vast and wide section which is populated across various middle-income brackets – to make use of the opportunities they so desire.” A plain reading of this phrase would mean the government has done enough for the middle classes. Now they are on their own.

RBI and most experts have cautioned the government that the recovery from pandemic lows is fragile and would need to be kept supported. Disregarding the advice, the government has decided to fully withdraw most Covid related stimulus. Food and Fertilizer subsidies have drastically cut. Rural development and social sector allocations have also been cut. Expenditure on health has also been cut. Of course, this all is done in the name of fiscal consolidation. I understand it is a tough choice , but if I must choose between 1000 km of new highway and food to 800million people for one year, I will choose the latter.

Transparently intransparent

The finance minister defined “transparency of financial statement and fiscal position” as a fundamental tenet of the budget process. However, it appears that in some cases the economic survey and budget documents have tried to evade or manipulate the statistics. The data points have deliberately chosen to show the latest numbers in good light. Points that could have hurt stock markets were evaded or manipulated in the budget speech. In some cases numbers have been stated ambiguously.

For example consider the following:

·         The finance minister skipped mentioning about restricting the practice of bonus stripping.

·         The actual growth in capital expenditure is yet to be figured out by experts.

·         The government has proposed Rs2/litre excise duty on diesel wef October 2022, i.e., 2HFY23. Instead of saying it in these many words, the FM chose to say “Blending of fuel is a priority of this Government.   To encourage the efforts for blending of fuel, unblended fuel shall attract an additional differential excise duty of ` 2/ litre from the 1^st day of October 2022”. As per her government order, it is mandatory to blend ethanol with petrol. Only high speed diesel is unblended fuel.

·         In last year's budget a whole deal of emphasis was given on disinvestment and privatization of banks etc. Nothing happened in the current year. The finance minister evaded even a cursory mention of this in her latest speech. If the government is so concerned about markets and investors, does it not hold any accountability to investors who would have acted on the promise of disinvestment and privatization?

·         The finance bill makes a significant effort to tighten the regulation over charitable institutions. There was no mention of this in the budget speech.

There is so much more to say, but I think I have broadly made my point.

The finance minister presented the union budget for FY23 this morning. The 90minutes speech was apparently the shortest budget speech delivered by the incumbent finance minister. There is little doubt that the presentation of both the budget and economic survey are smartly aimed at markets and investors.

The two fundamental ideas underlying the budget speech appear to be – (i) the government is now in a hurry to catch the digital train it has been missing for past more than a decade; and (ii) the government is earnestly keen to plug the leakages and loopholes in the taxation system.

Though the budget speech and economic surveys have made overwhelming use of digital and management jargon, signifying that professional managers are now running the policy defining exercise at North Block, I would try to derive the key message from the budget in common man language.

Positive take away

The three best features of the Union Budget for FY23 are perhaps

• The general status quo on tax rates.
• The government conspicuously accepts the role of facilitator in investment, providing the lead role to the private sector. The government capex (up 9% over FY22RE) is mostly focused on four facilitating sectors – Roads, Railways, Communication and defense. Rest all has been left to the private entrepreneurs with a promise of supporting and transparent policy regime.
• Institutionalization of “Vivaad se Vishwas” settlement scheme through “Updated Return” process. This along with restriction on repetitive appeals on matter law shall curtail tax litigation significantly.

Besides, the following are key positive take away from the budget:

•    The government appears willing to be a part of the global digital transition. Initiative to increase the use of digital technologies in key sectors like education, health, logistics, agriculture is a good omen. Infrastructure status to data centers is a step in right direction.

The initiatives like digital education platforms, health registry, documents registry could potentially bring meaningful difference to many lives. India may be running 10-12years behind in adopting digital as way of life and governance, but hopefully no more delays will happen and the proposals will be implemented without much delay.

Recognition of animation, visual effects, gaming, and comic (AVGC) sector as a high potential employment opportunity for youth; introduction of digital currency; and recognition of virtual digital assets (VDAs) like cryptocurrencies and NFTs, as legitimate assets, demonstrate the change in bureaucratic mind set.

•     Both the budget and economic survey have overwhelmingly emphasized on the need to promote the clean energy. Incentives for solar panel manufacturing, national battery swapping policy, differential duty for blended fuel, mandatory co-firing of biomass pallets in thermal plants etc. are some key initiatives announced in this budget.
•    Developing a 5km wide chemical free agriculture corridor alongside the river Ganga is a noble thought. Hopefully it will be implemented fast and in right earnest.
•      The river linking project is given further impetus. After Ken-Betwa, DPR for 5 more river linking projects has been completed.
•       2023 has been announced as the International Year of Millets. Support will be provided for post-harvest value addition, enhancing domestic consumption, and for branding millet products nationally and internationally.
•       Recognition of mental health as one of the top priorities.
•       Need for a paradigm shift in urban planning process recognized.
•      Transparency and promptness in government payments to contractors and suppliers.
•      Required spectrum auctions to be conducted in 2022 to facilitate rollout of 5G mobile services within 2022-23 by private telecom providers.

Negatives

The finance minister may not have answered the wishes of many people. They can see it as key negative take away of the budget.

For me the key negatives are:

•     The detail of ministry wise allocations of budgeted capital expenditure also raises many questions. Allocation to 4 ministries (Roads, Railways, Defense, and Communication) and Transfer to states for central schemes accounts for 87% of FY23BE capital expenditure. This leaves little allocation for important ministries like Tourism, Food processing, Science & technology, Education, Power etc. This seems incongruent to the stated objective of inclusive growth.
•     There has been too much emphasis on “reform” of taxation of charitable institutions for past few years. The trend continues this year also. While the government has is doing its best to plug the loopholes and repair the leakages, it has not addressing the legitimate hardships being faced by the institutions doing genuine work to help the poor and destitute. During Covid second wave, many of these institutions worked much more than the government institutions to help the distressed people.
• The size of LIC IPO seems to have been cut to below Rs500bn fromRs1trn earlier. Disinvestment target for has been cut from Rs1.75trn (FY22BE) to Rs780bn (FY22RE) and further lower to Rs650bn in FY23BE. This is incongruent to the promise of less government more governance.
• Lower disinvestment target is translating into higher net borrowing.
• The reliance on expensive source of funding (small saving fund) the fiscal deficit remains high; even though it has come down little from the previous year level.
• The gap between the fiscal deficit and revenue deficit continues to rise and is now 2.6% of GDP. In FY18 it had shrunk to 90bps.
•  NIL allocation for capital expenditure on building capacity for Bio Technology R&D.
• All Covid relief measures have been withdrawn. Food and Fertlizer subsidy cut sharply. Rural DBT allocation also cut. MNREGA allocation cut. The rural consumption shall get hit hard by this budget.
• The futile lack of transparency and attempts to manipulate the truth. Not mentioning “end of bonus stripping”; terming payment of Air India liabilities worth Rs50bn as capital expenditure does not bode well for transparency. Adjusted for this, FY22RE is marginally less than FY22BE. FY23BE Capex growth appears to much less than the 36% pronounced by the FM.

The finance minister has proposed to base the country’s development agenda on the following four pillars:

1   Accelerated development of world class infrastructure (PM Gati Shakti)

2.  Using digital capabilities for delivering inclusive development

3. Productivity Enhancement & Investment, Sunrise Opportunities, Energy Transition, and Climate Action

4. Crowding in private investment through enabling policy environment

 Let’s consider India as a company; annual budget as the annual account for the current year and forecast for the next year and the budget presentation in the Parliament and subsequent press conference as the conference call with various stakeholders.

An investor who wants to invest in this company would want to objectively analyze:

(i)    The past performance of the company in terms of growth;

(ii)   The credibility of the management in terms of professionalism, integrity, execution and delivery on promises;

(iii)  The future prospects in terms of growth, competitiveness, financial stability, cost of capital, price stability, etc.; and

(iv)   The relative positioning in terms of expected returns, access to markets, regulatory flexibility, costs (taxation etc.).

The past performance of the Indian economy in terms of growth has not been particularly outstanding, especially in the past one decade. The growth trend appears to have stabilized at lower trajectory and is showing no sign of transcending to the higher orbit anytime soon. Industrial growth has remained volatile but overall in a lower range. Exports have stagnated for more than a decade; though some spurt has been seen in recent months.

The credibility of the top management (Prime Minister) is high, but few of his managers enjoy the similar ratings. The execution and delivery of promises have been much below par on many counts. For example, the government has not achieved its disinvestment targets in the past one decade. The tax to GDP ratio has not improved. The unemployment situation has worsened only. The FRBM targets have never been achieved. The goalposts for the big infrastructure investments are being shifted consistently.

The future prospects in terms of growth do not appear particularly promising. The growth rate is likely to settle in below potential 6-7% range once the low base effect of FY21 and FY22 wanes. The financial stability remains very strong; though the cost of capital is rising. The government is consistently reliant on the most expensive source of funds to finance the fiscal deficit, which is feeding through the economy. Inflation has remained close to the upper bound of RBI’s tolerance range for many months, raising questions about the “growth over inflation” strategy of RBI, since a majority of the population seems to be facing Stagflationary conditions.

In terms of relative positioning, India has not been able to capture any substantive part of China+1 global shift. Many smaller economies like Bangladesh, Vietnam, Taiwan, etc. appear to have become much more competitive than India. Despite stated policy position, the access to Indian markets has remained highly regulated and costs (taxation) elevated. Many global players have announced major investments into Indian manufacturing, but the actual flows have been slow to come due to regulatory and other hurdles. The economy has lost critical time due to these delays.

Overall, India as a company appears a stable business with decent fundamentals. It however lacks strong growth drivers in the near term. The only moat for India is its pool of skilled tech workers; not many of whom hold loyalty for India as a business. If I am a global fund manager I would be too glad to invest in Indians, but remain underweight (unexcited) on India for now.