Verdict says we are ready to pay short-term price for long-term gains: Nilesh Shah, Kotak AMC
“Steps taken by the government to revive consumption is the focus of the market.”
What do you think this verdict means for India first?
It is a verdict where for the first time we are saying that if there is a short-term pain for long-term gain, we are happy to take it. We had persistently high inflation. We followed a tight monetary policy. We followed a reasonable pricing on agriculture products through a minimum support price that resulted in lower inflation and we had a little bit of lower growth because of that tight monetary policy but we have kind of rewarded that.
We had high fiscal deficit, we have brought down that fiscal deficit again it creates good macroeconomic foundation but there is an adverse impact on growth and we have witnessed that. We had very low tax compliance. We introduced GST, demonetisation, it improved tax compliance but it had a side effect on growth. We withstood that and so here, we have a verdict which says that if for long-term gain, if we have to pay a short term price, we will be more than happy to pay it.
What do you think is going to be next on the markets watch list? Is it going to be the composition of the cabinet?
Markets will be keenly watching what steps the government takes to revive investments which has been a little bit on the backfoot. There was lower capacity utilisation, there were issues related to availability of credit and cost of credit. How do we ensure that the investment piece starts falling in place?
Markets will also be looking forward to see the priority of the government. Last term, they were more focussed on building roads, providing gas connections, providing toilets facility to the villages and so on and so forth. Now what will be the priority because till such time private investment picks up, the focus will be on government spending.
The third focus will be that we are hitting a little bit of soft patch on the consumption side. Automobile sales have been down, consumer staples are also talking about subdued growth. So what steps are taken by the government to revive consumption side is clearly the focus of the market, as that will lead earnings growth for India Inc.
What tools do you think the government would have or does have at his hands right now to revive the rural stress and give the much needed impetus to counter consumption slowdown?
There is short term, medium term and easier on the longer time side. Clearly, we have to shift our policy which were first focussed on tackling deficits because we were perennially short of foodgrain production. Now we have moved to surplus. So, we have managed seeds, we have managed fertilisers, we have managed soil quality now that has resulted into surplus production. Now, our policy should be to tackle this surplus production. There is a huge wastage during transportation for lack of cold storage facility and that we need to tackle.
There is a need to ensure that intermediaries margin is protected. I believe for a Himachali Apple. farmers get about 25 paisa or Re 1, but a consumer in Mumbai ends up paying Rs 25 or Rs 30. So the wastages and that margin need to be tackled through better transportation, better cold storage facility. We also have to focus on value-addition. Jalgaon is today one of the largest places for growing banana. If I remember correctly, it is the seventh largest country in terms of banana production, but have we moved them into agro processing instead of banana. Can we have banana puree which we can export or banana wafers which we can sell?
So how do we tackle the situation on agro processing which creates value add for the farmers so these are all the steps which will require longer term approaches.
On the shorter term side, clearly the facility which government started -- eNam -- where buyers and sellers could come on a platform needs to be supported. We also have to look at how can we liberalise APMC guidelines in a manner where farmers end up getting a good price and the buyers also ends up getting a good deal. So, there are short term steps, medium term steps and long-term steps which over a period of time will ensure that the surplus production which farmers are making is still giving them value add.
Does it makes sense to perhaps get out of that defensive tilt completely?
It is a slightly tough question to answer because clearly market has seen a polarised performance. Index has been driven to current highs because of the performance of few stocks and they are today trading at above average valuation.
There is a broad market of small and midcap stocks where they are trading either around or below their historical valuation and they do not necessarily represent the largecap indices where they are today. Clearly, as portfolio managers, we will have to make a shift from overvalued expensive stocks to undervalued cheap stocks. At the same time we will have to ensure that we are taking into account the developing economic scenario.
Today the economy has little bit of issues related to availability of credit and transmission of credit. Because of the NPA crisis, many of the small and medium enterprises are not able to get access to credit market and the small and midcap companies by and large flourishes when there is more credit available in economy. They also suffer when there is less credit available. You will have to ensure that your portfolio is geared in such a manner that it fits with the developing economic scenario in terms of availability of credit and transmission of credit.