Naina Lal Kidwai, country head, HSBC India and director, HSBC Asia Pacific explains on CNBC-TV18 that yields have moved up despite a surprise CRR cut of 25 bps, the 10-year yields were "very close to topping" in the short-term. Kidwai expects inflation to surprise on the softer side and that the fiscal deficit for FY14 will probably be at 4.7-4.8 percent. Kidwai is hopeful that the Budget will address the unhealthy drop in the savings rate and indicated that the RBI has set the tone for a lower quantum of rate-cuts ahead.
Below is an edited transcript of the analysis on CNBC-TV18
Q: Is that pro-India mood still intact? We have seen a bit of an underperformance in the past week or so vis-à-vis global markets. Are you smelling any signs of people feeling – that okay enough of India after a great 2012?
A: I think investor sentiment is strong. In fact it is evident even from the Oil India issue in which HSBC was one of the three global coordinators. The issue has been well subscribed and saw strong institutional support and a return in retail investment. So what we have is a market that is not over-priced and at 16 times earnings it is actually quite attractive.
By virtue of being performing better and yet not being over-priced is attractive to investor interested on stocks that make sense. All these factors suggest that we still have a long way to go and that investment will return.
So, there is a lot to look forward to. But the signals are clear and right now India is getting a vote of confidence. The finance minister’s overseas road-shows I think have also helped in that regard.
Q: How will global liquidity behave? Will liquidity be as good as last year?
A: I think by just judging the mood at Davos, the fact is that nobody is saying this is not going to be a volatile year, but the mood is clearly one which is of cautious optimism, because the eurozone did not implode which was fear a year ago, the US is looking like it is coming out of its problems, both in terms of growth and a firm indication that it will resolve issues around the fiscal cliff.
And all of this is giving reason for stability and hope and the attractiveness of emerging markets like India which are showing higher growth than some of the Old-World economies continues to drive that liquidity into India. So I think the signals are all there, but no one is ruling out volatility and that volatility could of course destroy any of this confidence.
For India, the volatility around global oil prices is something that needs to be watched. Right now, it looks quite positive and prices are coming down. The long-term trend looks good as the US begins to vacate global markets because of its own shale oil production.
So, if India can get its oil-pricing right and make it attractive, the investment horizon should return. If there is a little more regulatory clarity, India could get a little more insulated from global oil prices and continue to benefit when global oil prices fall. So even though volatility is a concern, right now even that looks favourable from an India-standpoint.
Q: Shifting focus to the Budget, the FM has hinted about taxing the super-rich. How do you think industrialists and India Inc, in particular, will react?
A: I think you have to first define super rich. If rich is over Rs 10 lakh, then I would say it would really hurt the middle-class, hamper savings and stunt the growth in investment. Worse, it would adversely impact the stock-market which the government needs to keep at attractive levels as it embarks on a very ambitious disinvestment programme.
At the end of the day, how much will the government collect from this tweaking at the margins? Even if the collection is going to be sub-0.5 percent of the gross domestic product (GDP), but lose in value on the stock market and impact which would hurt the collections from disinvestment, which is far more than what you would collect, I would question the logic.
So, I would say this is not about tweaking tax rates. It is certainly about widening the tax base. The government needs to collect more and it is quite ridiculous that India has such a narrow base of tax payers. More attention has to be given to the way government spends money as it is very critical to ensure money gets to where it is intended. And to make sure that it isn’t a populist Budget with out-of-control expenditure which India can least afford given a fiscal deficit that is out of control.
It is key that the fisc is brought down. The FM has stated that he believes it would be possible to achieve 5.3-percent this year and that would only really happen if the expenditure scales back. The government should ensure that it keeps cutting the coat according to the cloth. The government must increase revenues but that won’t be easy because the investment cycle for industry is still not where it should be.
India has a lot to do to ensure it gets its investments back as investments bring higher revenue. Though fuel-price increases met with some opposition, at the end of the day they have been implemented along with the increase in the rail freight hike. All these are very good positive steps and in the long run and will bring order to the system and initiate the return of investment which is what is required. But in this process of reordering, we have really hope that March is not going to throw the fisc again way out of kilter.
Q: The Indian economy is stifled by a lack of investment. Are there any indications of a return of capex in 2013?
A: I think the economy is at a stage where though the sentiment has changed, investors are yet to put their money down. The induce investment the bottlenecks that have brought projects to a standstill have to be resolved.
In terms of new investments yes, the demand for India is still strong and for those that benefit from domestic demand, I do believe the investment cycle will return faster. But where investment has to return is in the sector of infrastructure, especially big-buck projects and for that I think there is a long road ahead which will have to be traversed by unscrambling projects that are stuck, refinement of regulation and policy.