If there is a broad based redemptions happening across emerging markets (EMs) then foreign institutional investors (FIIs) don't have a choice because they cannot sell everything else and not sell India, says Akash Prakash of Amansa Capital.
Akash Prakash of Amansa Capital is of the opinion that there is a growing minority that believes 5-6 percent gross domestic product (GDP) is the new normal for India. So, unless there are significant reforms in terms of judicial reforms and the way bureaucracy functions, we may not get back to 7-8 percent growth. However, he does not believe that India's long-term story is permanently vitiated.
The finance minister will have to deliver 4.8 percent fiscal deficit number because otherwise there is a greater risk of a ratings downgrade. For that the FM will have to savagely cut planned expenditure and if he does so then there will be no catalyst for growth.
If there is a broad based redemptions happening across emerging markets (EMs) then foreign institutional investors (FIIs) in India don't have a choice because they cannot sell everything else and not sell India. So, the broad-based long-only fund selling is driven by EM redemptions and not driven by them deciding to underweight India or cut India, adds Prakash.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: How is it looking? Just the darkest hour or do you think it could get even darker the way the news flow has been these last few weeks?
A: Hopefully we are somewhere near the darkest hour in the sense that it is difficult to conceive anything else further getting worse from here. In the sense that the rupee move has already happened, gross domestic product (GDP) growth already has been cut by most people, who estimate the GDP growth for the coming year around 4-4.5 percent.
The only thing I would say is that the markets have held up reasonably well. The large cap liquid stocks have actually performed okay despite all the headwinds. Midcap index is pretty much beaten down and probably is as bad as it gets, but for the large cap index you could argue that there is still downside.
Q: That downside might play out if global funds begin to sell. They have sold a bit but not lots. In your interaction with people do you sense that their patience might be wearing thin now?
A: The final capitulation if it were to come would be these large long-term, long-only money holders in India were to finally sell-out either because of redemptions or for other reasons, that shoe hasn’t dropped yet. More than the fund managers themselves I think the issue is people behind the funds the investors or the limited partners, what is their level of patience and willingness to stick it out in India and there there is a clear sense of fatigue setting in that people are just tired. The last five years most investors in India have not made anything in dollars. There is a constant question being asked that if you have made nothing in the last five years in a time when liquidity was very strong and flows into emerging markets (EMs) were very strong etc, how much longer are we expected to wait to make returns here. So, I think there is fatigue setting in. Combine that with the general sense of disillusion with emerging markets as an asset class more broadly. So, there is a possibility that some people just throw in the towel and say let me move my money back into the United States (US) or wherever that risk does exists.
Q: Has the basic confidence in the long term story also been dented because people have taken knocks in India in the past, they have gone through up's and down's but this time when we speak to people they seem to be almost suggesting that something is going wrong with the long term scrip out here which is not just a tactical correction of 20-30 percent in the market which happens quite routinely?
A: You hit the nail on the head. If there is the capitulation of the long term investors getting out it is exactly that saying that I can no longer underwrite India growing at 7-8 percent for the next 5-10 years. Till very recently there was still a sense that this is a short term problem, its high oil prices or inflation or lack of reforms etc. I think there are people now who are more broadly questioning what you are saying, saying that may be this 7-8 percent growth for five years between 2003 and 2008 was actually the flash in the pan and that we don’t have a governance structure or infrastructure in place to grow at that level.
The very strong liquidity flows in that period of 2003 to 2008 disguised or papered over lot of our structural weaknesses. So, the jury is still out. I am not sure that it is right to be so bearish to say that the long term view on India itself is gone; I think that is still too strong a statement. I am not as bearish to say that the long term story is permanently vitiated.
However, there is growing number of people in the US who are taking the view that the new normal for India so to speak is 5-6 percent GDP. Unless there is very significant reform or a more grass root level type of reform in terms of police reform, judicial reform, the way the bureaucracy functions very basic stuff, unless that type of basic blocking and tackling is done you are not going to get back to 7-8 percent growth and are going to be stuck at 5-6 percent. It is still a minority who thinks that but it is growing the minority is growing.
The longer we keep cutting earnings and GDP estimates, the minority will keep growing who believe that this is a permanent or a structural problem not a cyclical problem.
Q: That is one part of the scary script - the growth problems that you spoke about. Tied to that is the basic structural balance of the economy which is the way the deficit is moving, the way commodity prices are beginning to creep up again and the fact that the fear of that downgrade which we sort of swept under the carpet for a few months is beginning to come back. Do you think on that side too, investors are right in being a bit more worried now?
A: Firstly, the rupee weakness -the 15-18 percent move has serious fiscal consequences in terms of the subsidy bill, oil and fertilizer specifically. Secondly, the government was building in near 6-6.5 percent GDP growth this year when they made their Budget arithmetic back in February. Obviously that is not going to happen. So, there is going to be significant consequences in terms of negative consequences on tax revenue and you are not going to get the 18-19 percent tax revenue or whatever number they budgeted in the Budget.
There is serious expense overshoot on the subsidy side and looks like a significant revenue undershoot on tax as well as they are not going to get the money they budgeted for the spectrum and the disinvestment.
Having said that, the finance minister is very clear that the 4.8 percent fiscal deficit is a line in the sand and he will have to deliver that because you run much greater risk of a ratings downgrade if he cannot deliver the 4.8 percent on the fiscal deficit. So, he will be deliver 4.8 percent which means he will have to savagely cut planned expenditure again, which is what he did last year to make the budget arithmetic work.
If you savagely cut planned expenditure, I don’t see where you will get the catalyst for growth because one of the assumptions people were making was the government would come in, the public sector companies would make serious investments in kick starting the capital spending cycle. The government will spend money, that doesn’t look like it is going to happen. I think you are stuck with the current constructive of growth, which is reasonable consumption growth which is still slowing but still reasonably okay and almost non-existent fixed capital spending in investment because the private sector doesn’t have the capital or the confidence to make investments and the public sector or the government won't have the money if they need to cut the fiscal deficit back to 4.8 percent in the construct we have just talked about.
So, the imbalanced growth or the skewness of growth in India is entirely consumption driven and very little on the investment side. Unfortunately, I don’t see that changing for some time. You need to get that to change if you want to get a significant recovery in the economy. I don’t see where that thing will come from in the short term because the private sector doesn’t have the confidence or the balance sheet to make the investments required.
READ MORE ON Amansa Capital, Akash Prakash, gorss domestic product (GDP), emerging markets (EMs), planned expenditure, foreign institutional investors (FIIs), United States (US), Net asset value (NAV)
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