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Last Updated : Sep 02, 2013 03:56 PM IST | Source: CNBC-TV18

Need concrete govt policies; Q2 GDP to be worse: Vetri

According to Vetri Subramaniam, the government needs policy actions to address issues that are hurting the economy. He believes that the currency depreciation in recent times will certainly help exporters but there is a lot more that needs to be done by the government.

Vetri Subramaniam, chief investment officer, Religare Invesco Mutual Fund believes the market is looking for "concrete policy action" from the government to address some of the structural issues Indian economy is facing right now. According to him, the main concern of the equity investor right now is that the outlook for earnings growth looks fairly muted.

Also Read: Weak GDP growth may lead to more downgrades: JPMorgan

"The currency depreciation in recent times will certainly help exporters but there is a lot more that needs to be done by the government," he says in an interview to CNBC-TV18.

Meanwhile, Subramaniam expects the second quarter gross domestic product (GDP) numbers to be worse from first quarter numbers, which came in at 4.4 percent, because of the tighter interest rate regime from the mid-July. He, however, believes good monsoons may provide a tailwind in terms of GDP growth after Q3 onwards, he adds, on the industrial and service and banking side of the economy things look "very difficult".

Below is the verbatim transcript of Vetri Subramaniam's interview on CNBC-TV18

Q: Do you think for the moment we could get a technical pullback? There is enough in the market, we saw a bit of a rally last week as well hopes that as Parliament session ends some seminal decisions could be taken in the form of petrol hike, a new governor in Mint Street, will all that add up to some decent pullback?

A: I am not too focused on the short-term ups and downs of the market but now, the market is looking for concrete policy action from the government to address some of the structural factors that are hurting the economy, holding back Indian manufacturing and affecting our ability to compete as exporters.

The currency depreciation in recent times will certainly help exporters but there is a lot more that needs to be done by the government.

However, there could be pulls and pushes and there will be short-term news flow whether it is on Syria, new Reserve Bank of India (RBI) governor but all of these are short-term noise factors in the market.

The medium to long-term issues in terms of growth remain a bit of a concern right now and the concern that we would have as equity investors is that the outlook for earnings growth is looking fairly muted.

Valuations are not expensive, they are lower than average but you have third year of single digit earnings growth and it is hard to see how much progress the market can make under those circumstances.

Q: GDP at 4.4 percent was a bad number and that too in a quarter when we really didn’t have double whammy of rupee and interest rates. How bad does it get for this year? Are we staring at flat earnings or would they be a shocker lower?

A: The outlook for earnings is a grave concern at this point of time. For the second quarter numbers will most probably be worse from the industrial services, banking side because interest rates are tightening quite significantly from the middle of July and so you will feel the full impact of that in terms of the slowdown this quarter.

Good monsoons may provide a bit of tailwind in terms of GDP growth this quarter as well as the next few quarters but on the industrial and service and banking side of the economy things are looking very difficult.

If you look at nominal revenue growth for corporate India in the first quarter, it was already down at single digit levels of about 3-4 percent which is much lower than any measure of wholesale price index (WPI) inflation you may look at. So, we are in fairly dangerous territory in terms of growth as far as the economy is concerned.

From a corporate earnings perspective, while there have been some cuts to earnings forecast for FY14, at the beginning of April the corporate earnings forecast for FY14 were as high as 14-15 percent.

We have seen that cut by almost 300-400 basis points but even getting the single digit earnings growth may prove to be a challenge during the current year given the issues that the economy is currently facing. So the outlook for corporate earnings growth still remains very weak and that is why even though valuations are cheaper than average, you have to be a little cautious simply because there is no earnings growth traction visible as yet.

Q: On Friday you had tweeted that if the market collapse was attributed to Food Security Bill what should the recovery be attributed to? Did you get an answer to that and the follow-up would be, how much more do you see by way of recovery if at all this run has to continue?

A: It is hard to forecast these things so, I won't even try to go down that path. But there was a lot of furor over the whole Food Security Bill and clearly there are questions about our ability to afford it entirely. The government says it will not cost much but independent estimates are that it will cost a lot more.

The key issue over here is that as a country with a democracy which is trying to open up its economy, which is trying to embrace more free market principles, you cannot completely ignore the need for social security programs and therefore, the government has a right to pursue certain social security programs.

But the key issue is how much can you really afford and is there a limit in terms of your ability to provide subsidies and social security programs to the economy? The time has come for the government to take a very bold call as far as the subsidy bill on items such as fertilizer, fuel and electricity are concerned. These are costing the economy anywhere between Rs 2-3 lakh crore per annum.

You want to go ahead with social security programs go ahead with them but then you need to start cutting back these subsidies dramatically to fund that. The economy clearly cannot afford both elements to continue without any change.

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First Published on Sep 2, 2013 11:48 am
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