Govt spending to kickstart economic recovery; refoms hopefully create jobs: Sunil Subramaniam
- More reforms from the government will be on the supply side.
- Equity markets delivering returns ahead of actual economic indicators.
- Unless we create jobs for our growing population, there will be a civil war.
I am confident that the worst is behind us but I am not certain if the economic recovery has started. What are your thoughts?
What I am certain about is that the government is serious about kick-starting the economy. So, there’s a certainty that government spending is going to happen over the next 12, 15, 18, 24 months and that is definitely going to play its part. Now the choice that the government has exercised in terms of kick-starting the economy is the supply side versus the demand side and that is a crucial point to note.
The demand side is very generally immediately in effect. Suppose they give away farm loan waiver, suppose they do NREGA, you will immediately see a perk up in consumption, in liquor stocks and demand generally going up and there will be a visible recovery. But this is generally false dawn. The key is if you want to generate sustainable income accretion in India, it has got to be a supply side effect, which is what the government in my view, is focussing on correctly and that takes longer to percolate down but is much more lasting in terms of impact.
In fact, a RBI study shows that generally a consumption boost disappears in two quarters but a capex-led recovery — the capex multiplier effect — lasts for about eight quarters. What I am certain about is that the government is serious. The Finance Minister has again said that reforms are not done. We are going to come out with more action from the government. I am 75% certain action will be on the supply side. But whether economic recovery will immediately reflect there, I agree some quarters will show well, some not so well but if you give it enough time, India’s growth is not going to go from 5% to 4% but on the contrary will go up to 6-7% and even eight also.
The economy is going to change incrementally. It is not that tomorrow morning, we will have the aha moment and go back to 7.5% or 8% growth. Earnings will gradually start inching higher but the good quality stocks which you track are up 25% to 40% from the recent lows. Are the markets running ahead of themselves or have they normalised after the June, July and September scare?
It is a bit of both. There was an overreaction to the Budget and the kind of events which stroked correction. Second, equity markets are always lead indicators of economic recovery. so what I mean by lead indicator is that generally if you track economic recovery, the markets have always gone up ahead of the recovery and never waited for the recovery. So they are a lead indicator.
Now this happens the market is a function of impatient participants. Nobody wants to be too late to catch the next big thing. When you are consistently tracking the stocks and sectors and then you see that 16-18 months down the road there is a recovery, you do not want to see your neighbour go and buy the stock ahead of you. This impatience of the market players always leads to markets running up ahead of a thing and it is not a 100% certainty, it is a lead indicator but it is not a lead predictor. To that extent, sometimes the market gets it wrong because what they think is the natural follow through, does not come through.
But by and large, the market is never going to be under pressure. The market is always going to be trying to be one step ahead of the competition and hence will always bet on the directional move. You will always find that equity markets delivering returns ahead of actual economic indicators. So to that extent, I would not discount this rise in valuations.
You have hundreds and thousands of analysts who are studying sectors, studying stocks, talking to companies, getting that data and they are not talking to them about next quarter’s earnings; they are talking to them about plans for the future. If somebody says he is at about 75-80% capacity utilisation at a normal rate one year down, I will be there. But I need to start placing my order and so capex now, because there is lead cycle time for capital goods to be supplied.
That information percolates to the market participants and analysts who thinks that is a reasonable case and he would put his money there. That is what is beginning to happen and so one has to part catchup and be part predictive of the future is where the rally is likely to go..
Where are the opportunities in the market because increasingly one is getting the chatter that the highly sought after, high premium lot of 10-15 stocks are the ones that you need to lean out of and maybe deploy in the part of the market which has not done all that well?
We have a slightly different thought process. So, yes these top 15 names are always safe bets. Things will never go very dramatically wrong for them except for the odd bad apple which comes out. So, these shares act partly as a hedge. , The markets are predicting this recovery in the future, but what if it gets delayed further in which case my portfolios are likely to suffer. So, there is a safety element and that is the reason these stocks are being bought, not because they are the next big winners.
In near term 12-15 months, there is certainty about government spending. The longer term story to play are basically two things; the consumption slowdown happened was not because people did not have money but because people opted to save rather than spend more. The mutual fund flows continue to be strong — Rs 8,000 crore odd of SIP flows keep coming in, So, there is money in peoples’ hands. The trigger to move that from savings to investment and within investments the physical to financial move, is a matter of time. Money is there, it is already going a physical a little bit. Gold had taken a little bit of the cake, real estate has not taken that for quite some time. When the re-flow happens, you will see real estate also picking up, which in a way is good for real estate sector and the stocks and some part of it will go back into consumption.
The consumption story, especially the discretionary consumption and the consumer durable stocks are a definite play. We are confident that the per capita income which at about Rs 2,200 today, is definitely headed to at least Rs 5,000 over the next seven to 10 years. Consumer discretionary is a story that we are consistently playing.
Number two, in terms of discretionary spending, as people get better off, they are more willing to spend on financial services, insurance and mutual funds allocations. Dramatically, there is chance for growth because of the very low per capita utilisation in these products by our country. That is the second story which we see playing out.
The third story is the capital goods cycle story. If the government is going to spend, somebody is going to benefit from that spending. Whether that leads to GDP growth is a different thing but the government orders are going to come and somebody is going to go and execute. These are cyclicals which are dependent on government spending. There is also private spending and within that, there is FDI, there are foreign players with domestic players.
The domestic players spending on capex is definitely going to be the last part of the cycle. We believe the first step is government spending which will follow in some time, given the corporate tax cut for new companies we set up. FDI is definitely a good story that is going to happen. It will take time because there are a lot of other things to be sorted out on the FDI issues, land laws, labour reforms but the intention and the direction of the government are there.
I would like to point out the huge thing which is happening between China and India in demographic terms. We just looked at a recent study and in the 10-year period, 2017 to 2027 China is going to lose 21 million people from their working age population. In the same period, India is going to add 170 million working age people. Literally almost a 1:6 ratio on incremental people able and willing to work over the next decade. That is an inexorable force and that is not something any government policy is going to change because these people are already born.
Where are the jobs? Won’t having too much working population with no jobs a bigger problem?
Why do you think this corporate tax cut was announced? It is because they realised that without foreigners coming and setting up companies here, no way are we going to create those jobs. Indian per capita income at Rs 2,200 is too low to sustain the production capacity of our own people. We have to supply to the world and for that, we do not have the technology to be a prima facie export-oriented economy. We need foreigners to come in and set up their plants in India and re-export the stuff back to their country.
I think the government is serious about it and when that happens, then you are talking about this 6-7% growth. Yes, it is a big wall to climb and overcome but I do not think there is a choice because if all these people do not get jobs, you are going to be faced with a civil war in our country.
Directionally you cannot say that if I were the policy maker my single minded focus would be creating jobs because I want to win the next election, I have to make a dent into my job creation capacity and at least the announcements have to be happen. You have to create a feeling among the about-to-be employed people that there are jobs out there. It will take time to implement, it is not going to be a 12-18-month story, but there is no choice.
My point is the government is serious about it. The government wants the economic recovery to happen and is willing to take tough decisions. Whatever money kitty the government has, they are willing to spend. I have a simple way of looking at it – inputs lead to outputs which lead to outcomes. The outcome is the job creation. The inputs and the necessary outputs are going to lead to order books for companies listed in the stock market. And money can be made there.