Transcript of the Podcast
Hi this is your editor Arjun Parthasarathy speaking. The Friday podcast is a value add feature for the followers of Investors are Idiots.com. The brief podcast will select one topic for analysis and will be released every Friday.
This week’s topic is on “64th Republic Day message to the FM from the markets”
The FM Mr. P Chidambaram has started something that cannot be stopped, as any roadblocks will results in a catastrophe to the Indian economy. The expectations from the government are high post actions of FDI increase in retail, diesel price decontrol and commitment to lower fiscal deficit. Indian equity, bond and currency markets are expecting that the government will continue its push on pragmatism rather than populism.
The markets are not really concerned on reforms from the government. The fact that the government had the courage to act on a controversial limit increase in FDI in the retail sector and also allow oil companies to price fuel at market rates (albeit with some clauses but a major step forward all the same) has the markets seeing the government in a different light. Talk of “Policy Paralysis” has turned to “Bold Measures” to improve quality of economic growth.
The markets want the government to be prudent on its policies. Lower subsidies, wider tax net, rational allocation of scarce funds and reasonable policies for the industry are more than what markets could ask for. The government need not break its or its allies heads over these policies as the policies will lead to lower fiscal deficit, lower inflation, lower government bond yields, rate cuts by the RBI, improved portfolio flows and a stronger currency.
The FM has raised markets hopes for a good budget for 2013-14 that will show economy friendly measures rather than voter friendly measures. The big question markets are now asking is whether the FM can deliver on higher expectations. The Sensex and Nifty at 20,000 and 6100 levels respectively, ten year government bond yield at 7.85% and the Indian Rupee at Rs 53.80 have all rallied over the last few months on the back of the government moves on the economy. The markets at higher levels are stopping and wondering whether the government will continue on its prudent path.
The market expectation in terms of GDP growth is not very high. In fact mention of high rates of GDP growth by the government will work negatively as markets will immediately factor in higher inflation. High inflation is something neither the economy nor the markets want, as the consequences have been severe as seen in the last few years. GDP growth rates at below 7% levels in 2014 and between 7% and 8% levels in 2015 are fine for the markets as it shows that growth is happening without raising inflation expectations. The government is under no pressure to show extraordinary growth rates of over 9% levels seen in the 2004 to 2008 period.
In fact China is also content with growth in the 8% to 9% region rather than the high double digit growth seen in the 2000-2010 period. China has its own worries of over investment, bad loans, social inequality and corruption and is finding that stable, quality growth is better than scorching unstable growth.
The markets also understand that there will be pain in the short term for long term gains. Full pass through of administered prices to the end user will result in higher inflation in the near term but a lower fiscal deficit will bring down long term inflation expectations. Lower government spending can lead to sectors dependent of government largess showing growth slowdown but that slowdown will be taken care of by sectors that thrive on efficiencies. Markets are prepared for a longer haul this time around.
The message from the markets to the FM is clear, we will support you if you continue to do what you are doing but all bets are off is there is any change in the roadmap for the economy.
Thank you for listening in. Have a good Republic Day weekend.