Investors stung by erosion of the wealth effect in equities are at a crossroads. The Indian stock markets have not delivered absolute positive returns at the index level for the past four years, while the broader market is worse off.
While rampaging inflation and inadequate government policies were contributing factors to the underperformance in the last two years, we are witnessing some energy in reviving domestic growth in the recent past.
The government seems to be acting purposefully on all fronts where it has leverage, barring energy (oil), which is dictated by global factors. Agriculture has held firm in the last two years, while troubled segments of the economy, such as power and aviation, are receiving special attention.
The inflation trajectory is expected to be lower than last year, prompting a reduction in interest rates, which might, in turn, spur some activity for industrial capital expenditure. However, the days of the Goldilocks economic conditions of high growth and low inflation of 2003-07 are unlikely to come back.
In the run-up to 2003, at the peak of the Greenspan era, central bankers world-over thought the inflationary thug was locked up for life, before oil proved them wrong by galloping from $25 a barrel in 2003 to $125 a barrel in 2012. In contrast, India, the second fastest growing G20 economy, could manage a Compound Annual Growth Rate (CAGR) of eight per cent in real gross domestic product (GDP) growth with an average seven per cent inflation during the same period.
In other words, as the Indian economy tripled, oil jumped five times! So, while policy makers know the remedy, it is impossible to administer it in real time in a poor country like India with socialist moorings. In such a scenario, growth is the only viable alternative before the economy to correct its fiscal problems.
India has a distinct advantage, as it still continues to display a potential for seven per cent real GDP growth. This gives it enough ammunition to reduce the fiscal gap in the years to come because even a diehard oil bull does not expect a repeat performance of 5x increase in oil prices in the next eight years given the state of the global economy. However, India can still hope to triple its economy over the next eight years, which can reduce the fiscal deficit effectively.
In this context, India appears attractive, since as compared to a P/E multiple of 21x witnessed at the previous high in January 2008, we are currently trading at 13.5x FY13 earnings and over the next one year as the markets factor in FY14 earnings of Rs 1,490, it can trade at 14x, offering an upside of 20 per cent from the current levels.
The author is managing director, institution, Angel Broking