Will 2016 be the year of recovery? Experts answer

At a star panel comprising of the country's top bankers, investment bankers, economists and private-equity investors, CNBC-TV18's Menaka Doshi fleshed out answers for a commonly-asked question: when will India's full economic recovery take place.The panel comprised of: Amit Chandra, MD, Bain Capital; Pranjul Bhandari, Chief India Economist, HSBC Securities; Ridham Desai, MD, Morgan Stanley India; Nilesh Shah, MD, Kotak Mahindra Asset Management; Vishwavir Ahuja, MD & CEO, RBL Bank; Srinivas Varadarajan, Head FIC, Deutsche Bank and Pawan Kaushal, Chief Risk Officer, IDFC Bank.Excerpts from the interview. Please watch video for the full discussion.Q: Was 2015 below expectations and what do you expect out of next year?Chandra: The first mistake that the market seem to have broadly made is miscalibrated expectations. You had a patient in the ICU, you expected the patient to come out and start running a marathon that doesn’t happen. There is a gradual, there is a period of repair that happens which is I think what we have been going through. Let us not forget that repair did have some tailwinds that is in the commodity price side but it also had some headwinds because of everything that was happening on the exports markets. The commodity price decline also impacted segments of the Indian economy so I think there was a lot of noise in the last 18 months. So, the expectations that 2015 would have been a banner year were in my view misplaced. Our own view going into 2015 was that 2015 would be a very tough year but would set up the foundation if the government did the right things mainly on repairing its balance sheet for 2016 and 2017. We are very pleasantly surprised by everything that we see whether it is what is happening on the fiscal deficit which is managed by the government, overall impact on the current account surplus which we have been running. The way the Reserve Bank of India has been building its reserves with all of that you are setting up the stage for what should be a very strong rally. There is reason why we should not have one. Q: You have just put out report recently saying only 50 percent of the gross domestic product (GDP) has effectively done better and half the GDP is not performing?Bhandari: That is correct so because nobody believes the new GDP data we tried to look at about 25-30 activity indicators and we mapped them to difference sector of the GDP. Now what we find is that about 50 percent of GDP is improving but the remaining 50 percent is still not improving. Then we actually probed a bit more on the 50 percent that was improving and there we found that about 35 percentage points is improving because of the oil bounty. So, manufacturing sector, urban consumers, public investment they fall in that 35 percentage point. 15 percentage points is improving because of government action both on any reforms that they might have done or the fiscal stance that they are running. Q: Only 15 percent?Bhandari: 15Q: Would it be fair for me to say that the oil bounty has pretty much sort of run its course? Bhandari: That is correct, so that is where I was coming to that we had two big drivers of growth this year and both of them will probably not be as alive in kicking next year. Most of the benefits of oil prices falling from USD 110 to USD 40 per barrel have already accrued. We have already benefited from them and the savings on the oil subsidy bill by the government which it could then very deftly move in to capex that has also happened this year. So, basically 2016 in my view, it is going to be a tricky year because it is a year when we have to smoothly change drivers of growth.Now I don’t want to sound like a perma bear . There are couples of drivers out there which look exciting to me for example consumption demand. The remaining of the monetary transmission that we may see and as you were saying foreign direct investment (FDI) which is probably the most growth enhancing form of inflows a country can have so these things are there. However, at best they can in some sense cover the gap that the drivers of 2015 will leave. In my sense growth will probably be more flattish than something which is much higher than what we have seen in 2015. Q: Are you seeing green shoots in revival in consumption?Bhandari: Not yet, the problem right now is that urban India I am seeing some green shoots but in rural I am not and what the last GDP data suggested was rural was more than offsetting the urban gains. We really need to fix that.Q: Some of that at least is dependent on the weather gods to some extent?Bhandari: To weather gods but a lot more on things like infrastructure than people imagine. Rural inflation is still about 6.6 percent. Urban inflation is closer to 4 percent. There is this huge urban –rural inflation divide so it is like a double whammy for rural Indians. Their nominal wage growth have fallen and they are experiencing higher inflation so their real wages have really declined. Q: Answer all of the questions that have in some sense have come up but also talk about corporate earnings because unfortunately we have seen no relief in that at all?Desai: Firstly, on why economic growth disappointed, so I think two things. We are simplifying all this, so bear with me but it is more complex obviously. The two simple reasons are one – we under estimated the extent of fiscal tightening. Let us think about this for a moment. In May 2014 when this government came in the fiscal deficit was over 6 percent. Today we are running at 3.7 this is probably in my memory the stiffest tightening that we have seen in such a short span. India has taken its toll on the economy. Of course it has given us the benefit of grater macro stability therefore it has given confidence to the central bank to cut in front of the Fed; we have benefited in a lot of ways the point that you made about FDI – it has not just come to us like that. It has come because we have achieved macro stability but it has come at the expense of near-term growth. Now we are set up for better growth but I would say that we under estimated. This government is on track to beat its fiscal target for the second year running that hasn’t happened in long time. Governments have only missed fiscal targets so again that tells you that they are doing better than what they had also actually anticipated. Second is global, just think about it global trade has collapsed. Who thought about the way it has collapsed. I mean nobodies forecast had such a big collapse in global trade. Even though India is largely domestic economy it has taken toll on India on an absolute basis that is why our absolute growth number is lower. We are still better than rest of the world but we are lower on an absolute basis. So, that explains economic growth. Now earnings, the single biggest factor in earning is the producer price index (PPI). Real growth, assume at 7, I think it is more like 6. When growth was 7 percent in the last decade nominal growth used to be 12 percent because we had a 5 percent GDP or a 4 percent GDP deflator and 7 percent real growth. Today arguably the GDP deflator is in negative territory so 6 percent real growth 5 percent nominal growth so corporate India is not experiencing anything like what the real growth numbers suggest because there is no nominal growth. An earnings is a nominal number and if nominal growth is weak then earnings will be weak. So, margins are actually improving but revenue growth is falling. That is what corporate India has actually reported a 5 percent compression in revenue growth and when your revenues are going to fall 5 percent it is hard to actually have positive earnings growth. So, that is the signal with biggest factor which explains why earnings have missed.You spoke about the markets as well, emerging markets (EM) are finishing this year as a third down year that hasn’t happen to EM in a long time since the EM asset class was invented. Guess what, this year EM asset class is down 25 percent. I think we have gotten away with a double digit fall – 10 percent. So, we can’t take returns out of context.