Ridham Desai of Morgan Stanley has been one figure who has remained bullish over India's growth story. Calling the current juncture in Indian economy its 401k moment, Desai's optimism over India remains unnerved even as the BJP government passes the baton to a coalition, albeit with Prime Minister Modi at the helm.
Desai discusses more on these topics in an exclusive interaction with CNBC-TV18. Here are the edited excerpts of the interview:
Q: We have Modi 3.0 loading now and in your report, you said that the next decade is going to belong to India. There are a lot of sceptics who believe that this time because it's not just the BJP government, but an alliance government there could be some roadblocks? Do you think that's going to be the case?
No, I don't think so. I think we got spoiled in 2014-19, but India's template since 1989 has been coalition governments and this will be a very stable coalition. So I see this government working through the next five years. I don't see any shift in policy, macro stability will be the key focus along with building the supply side. These are the two things that this government will do and essentially the idea is to take India's potential growth rate from 7 percent to 8 percent without triggering any inflation side effects and I think this template will be the way the government will work forward.
Q: When you say coalitions have done well in India, do you take examples from 1998, 1999, maybe even 1990 and 1992?
We can sewage ourselves by taking all these examples but every situation is afresh. Those who are skeptical have to be reminded that reforms have to be carried out with the will of the leader and it is not a function of how the government is structured. I don't see any change in this Prime Minister's will to undertake structural reform.
Q: You've written in your report that this is India's 401k moment and domestic money is going to drive the Indian market from here on just like it did in the US market multiple decades back. Now that's come true, do you think that's going to continue and why are FIs still not buying this market when there is so much visibility?
There are only two cohorts in the market, there is a domestic investor and there is a foreign investor. Every single day the domestic investor is putting money to work. So where is the space for the foreign investor to buy? Because in the market you need one seller and one buyer.
So I think the seller will emerge now which is the corporate issuer, so corporates will start raising money and that is how foreigners will get space to buy. So if you ask me for a prediction which I will make, I think in the next six months foreign buying will turn into India. How much? I don't have a number, it depends on the corporate issuance cycle. So I think corporate issuances will grow and I see a robust primary issuance cycle because of India's investment cycle also.
Q: In the US, the household bids on US stocks lasted for just over 20 years, it started in 1980 and ended with the Nasdaq bubble. We started in 2020, so how long do you think our retail money will flow into the market?
This has a long way to go because, unlike the US, our demographics are not turning down in 10 years. In the US, demographics started reversing at the start of the millennium and the baby boomers started retiring and they started withdrawing. That's not happening in India for the next 15, 20, 30 years. So we could have a very long change.
The government may allow retirement funds to put more money. They're currently capped at 15 percent on incremental flows. The experience has been very good. They can deliver returns to their savers. So why not take this number up? That's also a possibility which will lift retail inflows.
Q: With Modi 3.0, are you saying that it's going to go down the same path as Modi 1.0, Modi 2.0 in terms of fiscal consolidation, in terms of spending where it's needed and in terms of not necessarily going towards the populism route?
I see an acceleration actually. Because COVID did derail some of the fiscal consolidation. I see India into a primary balance in three years making it the only large country in the world with a primary balance. Primary balance is when you don't have excess expenditure over revenue. So you are borrowing to pay interest costs.
Technically you're bankrupt if you're borrowing to pay interest costs. If a corporate has to borrow money to pay interest costs, that corporate is bankrupt. Governments do it because they can print their way out. Our government will not have that deficit anymore. When that happens, the government’s balance sheet will deliver very rapidly. Because we have a nominal growth of 10-11 percent.
If the government is not borrowing to pay interest costs, you get a major lift to the private sector. So crowding in of private debt to GDP and crowding in of private investments will happen. And funding in other areas like infrastructure build, like energy transition, like manufacturing, will accelerate further.
We have so much more road to travel on this. It's not the end. It's not like we have achieved everything we want to. We're still a poor country. We still have only $2,500 per capita income. We should be targeting a five-digit number. And that can only happen if we lift investments.
Q: In terms of portfolio positioning, what do you think you should be going with right now? Mainly domestic economy-oriented stocks?
Absolutely. Domestic cyclicals. I think the private banks look good. The consumption stocks across the spectrum look good. And wherever there is any room for valuation, that should be a great investment area to be in. I think industrials look good too, however, you have to be a bit selective because the valuations may be elevated in some places. And yeah, I think as a contraband, IT services according to me continues to look good.
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