India isn't shining

Saying ‘forget fundamentals, it’s all about the flows’ worked well in Q1, with $8 bn flowing into Indian equities. But already the last few weeks have looked more uncertain, as concerns on Spain have re-appeared, and fears on China’s outlook have grown. Meanwhile, US growth expectations are already high, so there is less scope to surprise on the upside. This implies that, at best, we’re in for a phase of consolidation, with less of a clear direction in the global macro data. That suggests a more discerning market and more focus on India’s fundamentals. So, how bad do they look?

The big events of March all ended up being neutral to disappointing: the Reserve Bank of India (RBI) left the repo rate unchanged; UP elections were disappointing for Congress and the Budget was relatively safe and neutral.

The combination of elections, ‘coalgate’, GAAR confusion and retrospective tax amendments have once again triggered negative foreign investor perceptions about India. Yet, the government seems to assume that despite policy paralysis, overreaching executive actions and now retrospective tax amendments, foreign investors will just keep on coming.

In the run-up to 2008, a lot of the foreign investment into India was chasing ‘India shining’, seeing the world’s second fastest growing major economy, a model of high growth, fiscal consolidation and macroeconomic improvement. That picture is quite different today. Yes, growth is still high, relative to almost every other global economy. And, yes, that economic potential remains remarkable. But, there are lots of issues that need to be worked through before one can unambiguously become bullish about India macro. Be bullish on India micro; on states, sectors, themes and stocks, but to get more bullish on India macro is going to take some time.

There is a struggling coalition government. A lack of balance in economic policy, with a fiscal deficit that doubled from 2008 to now, and overemphasis on monetary policy to combat structurally high inflation, resulting in overly aggressive rate hikes, discouraging investment and impairing growth. There is then the unhelpful issue of oil running at an all-time high in rupee terms. Every 10 per cent increase in global crude prices could have a direct impact of 0.5 per cent increase on WPI inflation, as well as dragging down growth.

We think RBI will cut the repo rate in April, but that it will be unable to cut rates aggressively or decisively in FY13. So, whilst the picture should slowly improve, for now, I’m cautious.

The author is country head, Espirito Santo Securities (India)