India could potentially be in the best five-year period of its economic life: Manish Chokhani, Enam
Budget will be first big signal of how the economics of this country can now be rebooted, says Chokhani
What explains yesterday’s rather painful market reversal? It was more than 5% from the intraday high?
First of all let us celebrate what happened yesterday. What has happened in our country was quite unprecedented. It seems to be moving beyond caste and equations like that and seems to be a vote for development and aspiration.
It just means that hope of delivery for this government is that much higher as I thought the expectations were muted. This is unlike in the stock market in 2014 when the government had come to power, the expectations were sky high and the delivery was probably middling. Currently, the expectations are muted and therefore the hope was that the delivery could be beyond expectation.
We have also spoken in the past about the fact that the governments eventually do not matter as much as the external environment, the underlying demographic and industrial trends. I continue to hold the same view that the government has an extraordinary chance to seize the opportunity presented to them by a demographic dividend but the global headwinds are very strong and severe -- be it from oil or trade war or the slowing developed world. That will always be a drag on our exports and therefore we will need to a lot of major reform in this administration to get India to its potential double digits growth rate. The exit kind of GDP that the government should target should be in the magnitude of $5 trillion, given where we are starting from today.
From a market perspective what happens next? There is a lot of talk about who is going to head the finance ministry and other key portfolios like defence, home, etc. Would that be keenly watched from the market’s perspective?
Yes, of course. In addition to what is going on in the rest of the world, it is extremely important to figure out what the economic architecture of this government will be because I read like most people that Finance Minister Arun Jaitley’s health is not great. So who takes command now of the finance ministry, commerce ministry and lot of the economic related industries -- whether it is transport and infrastructure and railways and so on -- will start to signal to what the government is thinking about.
Also the budget which is due in July, will be the first big signal of how the economics of this country can now be rebooted. And from a very narrow financial perspective, (there is a 3.5% odd fiscal deficit to GDP), the government does not really have room for unleashing a lot of stimulus to revive the slowdown in the economy and therefore it gives me at least hope that for the first time someone will have to bite the bullet and start to privatise now.
The prime minister has said for very long that there is no business for us to be in business. They have a list of companies which they have held for strategic privatisation for some time. These are minor loss-making companies but I would expect to see some names coming out from there. I would also expect some of the PSU banks to start merging. There may even be a consortium formed around PNB and that may be the next one after the way they have managed it for Bank of Baroda.
Along with that, one has to think of solving the distress in the rural hinterland by getting people off the farms. The solution will have to be greater urbanisation and the creation of many more cities and factory jobs to also tackle the trade deficit. That would be the kind of economic architecture this government should be thinking about.
One is the ideal scenario, privatisation starts, banks are consolidated, there is emphasis on job creation, capital formation. But what happens if there is a middling delivery on the economy front? Then are we facing more of same like in last five years?
The market discount is at the margin and you discount rate of change rather than the absolutes. In the last five years, the markets lived with the lack of massive absolute change. It may have been incremental change and the markets therefore performed the returns in the last five years. The headline indices were probably 55-60% in five years which is not spectacular by any means, given the ability that this government has. There is virtually no opposition to what the prime minister now would seek to do.
Also, given that this is likely to be his last term, he will be 74 when the next elections come about, this would be his chance to stamp his imprint on history. When people have given you that sort of mandate, it is to push the growth rate up to 10%. It is not to be satisfied with 6.5% or 7% and then claim we are better than the world because the reality is, in absolute terms we have lost the race to China. We are one-fifth of their size. There is a lot of catch up to do and unlike the last five years, where we could compare with the previous UPA administration, this time the benchmark the country will have will be with external benchmarks.
It is not that there is lack of brains or lack of manpower or lack of opportunities in this country. The challenges are serious and I would expect to see a faster rate of change than we did in the last five years.
How should the privatisation theme be approached from an investment perspective? Do you already start nibbling into the PSUs or do you wait for a blueprint first?
It is time to start researching and preparing to start nibbling over there because for the last five years, the PSU space has been the most hated space. A major part of the economy is public sector companies. It is inevitable that given the magnitude of infrastructure buildout of a trillion and a half dollars or 10-12% of GDP consistently for the next five years, which this government has promised, and given that we have a completely constrainted fiscal situation, the narrative can be very easily constructed by the government to say that all we are doing is shuffling assets, selling asset A to create asset B for the country and it is not unusual if the Ambanis and the Tatas and the Birlas are selling assets in one pocket and creating assets on the other pocket.
It is what every prudent business person and every prudent government should be doing. The holy cow of the nehruvian temples of modern India was absolutely correct when it was done in the 1950s, but it is almost 2020 and that model has outlived its utility. If the Planning Commission, he GST Council can be dismantled, why should PSU privatisation not happen?
I do not think the average voters are concerned whether they get a steel from the Steel Authority of India or Tata Steel.
When do you think the animal spirits will return to markets, if at all?
I might sound like a broken record but animal spirits revive when there is an easy profit opportunity visible to businessmen. When you got the insolvency code and saw assets being sold at 25 cents on the dollar, everyone in the world jump in and said we are going to start making bids and then of course there is a one year-two years dragging of process which does not seem to end. We need a combination of both. A good profit-making opportunity which things like privatisation should offer and which was evidenced in the first NDA regime headed by Mr Vajpayee, Second, we need to accomplish the closure of these transactions quickly rather than letting them drag on for years.
The first batch of companies which were privatised in India include IPCL, which now sits inside Reliance Industries and Petrochemical and has become the biggest money spinner for that company. Hindustan Zinc now sits inside Vedanta Group and just the dividends that this company has paid has been 10x of what the value of the company was when it was privatised, leave alone the enormous wealth creation it has achieved by way of market cap creation and so on. Maruti was sold to Suzuki and you have seen what sort of wealth creation and profit has happened over there as well.
What will excite the whole world and draw the trillions of dollars which is available to India to come in and second, that would help the infrastructure buildout for which $300-$400 billion is needed. The Indian banking system is not in a position to start putting money back into infrastructure. You will again have to attract people from overseas who are not going to come and take Greenfield risk, you will have to hand them over running projects on an operating basis and the government will have to take on the onus of a lot more of the Greenfield buildouts -- be it for metro rails, bridges, ports, airports and so on. There you could possibly be a public private partnership kind of model but certainly action needs to be done really quickly.
These will also create a lot of jobs which will be beneficial for the economy.
Besides privatisation, could the Modi government in the next five years come out with any big innovation on the lines of the GST implementation or a shocker like demonetisation?
The last five years in some sense was about clean-up and consolidation of the economy and the next five years is about meeting aspirations and going for growth and a higher rate of growth. If you want to increase per capita income of people, you have to get them into higher paying,better skilled jobs, For that a) you must have a higher investment rate and b) you must have a better level of efficiency coming out. That implies that you have to have a lot more lenient attitude towards business. He alluded to it yesterday in his speech when he said there are two categories of people in India now, they are the poor and then there are those who are trying to help the poor to get out of poverty.
So, the focus now is not be seen as the suit boot ki sarkar which is friendly to business at the expense of the poor but actually seeing them as the two kinds of wheels which will drive this economy forward. I thought that was a very smart narrative which Modi slipped in yesterday and it is laying the ground work for saying that let us now get friendlier with business to help them to expand the size of the economy rather than trying to divide up the existing cake which clearly has not been expanding at a fast enough rate.
I would also think that this the whole areas of what they have alluded to in the past of judicial reforms, administrative reforms and even committees on RBI headed by Bimal Jalan to take actions over there to make the direct tax code as well as the GST code a little more simplified so these are all pointers towards ease of business and trying to accelerate the velocity of the economy.
The sheer scope of the mandate and the stature of the Prime Minister now is substantially different from what it was in the first term. It is giving me hope that things could happen at a more accelerated pace in the coming months.
Irrespective of NDA-1 or NDA-2 economy follows a pattern, there is mean reversion, there is an economic expansion. Where do you think the building blocks have been placed? Also where do you think automatic migration will happen irrespective of the political mandate?
If you think of the three big engines of the economy being consumption, investment and exports, clearly the world is not going to give you a great deal of support on exports. It will be building time for India in a sense that if you are going to move people into factories and urban areas, that will take its time to play out. Consumption has slowed down largely because of the wealth effect as well as because of the liquidity concerns in the economy.
I would be very surprised if the first building blocks now of this government do not get unleashed through the investment side. And like you all have been rightly pointing out, how do you revive animal spirits to get people to start investing and making fresh bets on creating capacity in India because people have been so burnt in dealing with land laws and labour laws and administrative laws and compliance that until all of that starts getting eased off. Those are the sorts of things I am alluding to which should occur in the next few months rather than years that is really going to be the focus of this government.
And that whole side of the market has been neglected so badly by everybody because we have all migrated to consumption and we are playing investment in a sense through the corporate facing banks which would have lent to these people and they have come out of that cycle as well but the two biggest hated areas in the market may therefore be a fertile ground to look at, would be this whole investment in infrastructure related companies led by L&T.
The other side is the neglected public sector which need the magic word of privatisation. The first round of privatisation in 2002-03 kickstarted the first big massive bull market in India of 2004 to 2008. A lot of these PSU stocks had in fact given you 10 times to 20 times of return in that period itself.
If you have to let us say draw a parallel between the economic setup versus the global backdrop, versus the central bank positioning, what does 2019 resemble?
2019 is tough. When Modi came in 2014, he had a big tailwind of falling oil prices; the economy had come out of the fragile five; Raghuram Rajan was cutting rates, getting flows back into India. I do not think the setup is as nice today. As I said earlier, the external environment is certainly not supportive to the country. It is supportive if we create that whole profit opportunity because then this money sloshing around the world at 1 and 2% interest rates can come into India and help us revive the whole investment cycle.
This time, the win will have to be of our own making, unlike the last time, where the tailwinds were behind us and made our economy look better than it was just by the sheer fact that oil went from three digits to probably close to $30. It is actually the reverse situation now and the world trade is certainly not as supportive as it was at that time.
Also the economy with this whole move towards making it more compliant and more legalised with GST and other actions is still recovering from that shock because people were used to not being so compliant or paying their taxes but fortunately, that migration is probably now behind us and we can look forward to people looking to a better velocity in this economy.
If you get both engines going, then you can invest at a higher rate and you can get velocity of the economy moving faster. That is really the recipe to get up to the 10% and 11% kind of growth rates.
Does it worry you at all that the US bull market has lasted us 10 years and ours too! If you were to map historical cycles, the market would fatigue at some point or do you think the economic domestic growth engine is so strong that irrespective of what happens in the US, we are going to go on?
The developed world has kind of run out of bullets with QE-1, QE-2, QE-3 and now they are discussing MMT theory that you just print money and do not bother about anything. But the reality is, those are ageing demographics at the end of an economic lifecycle. It is not a cyclical downturn in Japan or Europe, they are probably secular and structural downturns and Japan has actually been in a bear market for 30 years. In my entire career, I have not seen a bull market in Japan other than the occasional rally because fundamentally these economies have run out of gas in terms of demographics as well as growth rates and so on. They are trying to just keep their current standard of living alive.
The emerging markets like China and India have played into their hands by allowing their currencies to continuously depreciate against something which is continuously being printed every day. It seems really strange that someone is printing a trillion dollars a year but it is your currency which is falling against that. So there is a regime change coming in the world. Within that regime change, it is a bit like in a market when the largest market cap company does not perform. it does not mean the midcap cannot still grow; it will certainly get rained on when the market falls, but when it comes back it comes back even more roaring than in the past and then it transitions to become the large cap.
In that context, India has steadily climbed up the market cap ranks and the large GDP ranks of the world and I would imagine irrespective of whatever happens in the world, we will end the next decade being the third largest economy in the world. And today the gap is maybe 10x:1 with the US and India.
Probably as we end the decade, the gap is going to be a lot narrower compared to where our size of GDP is. And from that perspective, you will be surprised at the amount of interest and capital which will be available to India whenever a downturn occurs over here.
I am not making the case that there is some glorious bull market around the corner and 2019 certainly is not going to be to my mind more than a plus 10% kind of move for our markets. But what lies ahead is what the markets will discount and the rate of change is the signal being given by the management team in a sense of this new administration which will determine what the long term multiple of our country is. Again sitting from where I am today, there is no reason to not be very optimistic that India could potentially be in the best five-year period of its economic life because the demographics are right and the opportunity is there and global capital is available when there is a dearth of opportunities elsewhere in the world.
So you could potentially have a slowing global economy and an accelerating Indian economy largely driven by domestic investment and consumption and it is entirely possible.