Business Head & CIO, ASK Investment Managers
Agarwal has over 25 years of experience in the capital markets, and brings in immense and expertise across domestic and international broking houses. In his previous assignments, he has held senior positions as Head of Equity in Bharti AXA Investment Managers, Head of Equity ABN AMRO AMC and as VP & Head (Strategy and Research) at SBI Capital, where he was the youngest team leader heading a full-fledged research team.

Why the long-term outlook for India equities look so tempting

RBI expects growth to restart from March quarter and continue into FY22, though at lower-than-trend rate of growth. After every period of a major economic stress, India has bounced back strongly in the past.

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With trade pacts and low import duties, manufacturers can target far-off markets, building stuff in smaller countries with smaller domestic market.
RBI unveiled its monetary policy recently. While policy rates were left unchanged, the central bank did underline the need to kickstart the economy and said it expects the accommodative stance to continue for a significant period of time.

RBI expects growth to restart from March quarter and continue into FY22, though at lower-than-trend rate of growth. After every period of a major economic stress, India has bounced back strongly in the past.

We have seen this happen in the early 1990s when reforms such as opening up of the economy to foreigners for the first time brought about a sustained phase of growth. Lowering of international call rates and availability of bandwidth created a significant IT industry, which has grown strongly and become the biggest absorber of trained manpower in the country.


Similarly, in the early 2000s, we saw a strong reforms momentum – privatisations, public-private partnerships, infrastructure building, market-linked fuel pricing (though reversed later) –to spur strong growth over the 2004-2008 period. India had the benefit of strong savings, which banks could channel to create infrastructure and help industries grow.

I believe it would be no different from here on. In this period, while the start may be slow, we should expect growth to gain momentum and last longer.

The current setting is similar in many ways and different in many others. After a long time, we have seen a sharp quarterly contraction in GDP of 23.9 per cent. FY22 may see close to double-digit decline in economy growth. The need to have reforms to spur growth and attract investment is clearly there. I do believe we are already seeing the chosen reform path through various steps taken under the ‘Make in India’ initiative, which has gained momentum over the years.
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I do believe we are seeing an acceleration in the same during this period. India’s savings rate, though still high, has fallen from the peak. In the recovery process, a greater participation of foreign funding would hence be required. The situation is conducive for the same, as global interest rates are at all time low and liquidity is high. The focus on manufacturing would require overseas money. Manufacturing also requires incentives to move from one country to another, because as such, the world has excess capacity in most products and current clusters have competitive advantage.

With trade pacts and low import duties, manufacturers can target far-off markets, building stuff in smaller countries with smaller domestic market. This would mean large countries with less manufacturing would need policy making towards better access to their own markets for domestic manufacturers.

Manufacturing also would require technology support in many spaces. The benefit India has is the lure of its potentially large market that every MNC wants to participate in. While China has been more successful, India is seen as the next and the last big market to focus on.

While our pacts with ASEAN and low import duties in general has allowed foreign companies to target Indian market from abroad, the post-pandemic world may be very different. The government’s role in an economy is increasing as private spending reduces, and this would allow the government to focus more on domestic companies vis-à-vis imports.
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In any case, the focus on domestic manufacturing is there to meet strategic goals. We have seen several initiatives towards making India a more attractive place for manufacturing. In critical areas, industry is being incentivised. Production-linked incentives (PIL) have been rolled out in electronics and are the same is expected soon in chemicals and pharmaceuticals.

PLI seems to be the instrument of choice for the government. We expect to see such benefits extended to more industries. At the same time, import duties on many components are being increased to ensure backward integration. Moreover, duty-free imports from FTA countries is being focused on and importers are now required to certify that the imports meet the value addition norms specified under the FTA.
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In some sense, there is an attempt to claim the Indian market for manufacturers in India. The corporate taxation for new units in India is already one of the most attractive globally. Moreover, labour laws have also been changed recently.

Agri and rural parts of the economy are already in good health with consecutive good monsoons and a steady increase in farm goods prices. With time, the new farm bills would increase competition in sourcing and further help farmers squeeze out the middleman.

The services part of the economy, particularly export-oriented software, is doing well too. There is stress on SME businesses and businesses related to leisure and travel & tourism, which could stay for some time.

Overall, there is a great chance that Q3FY21 would be a close-to-zero growth quarter (vs expectations of negative growth) and the consumption booster provided by government would help.

Growth should commence from Q4 and gain strength as we go into FY22. The fact that both fiscal and monetary policies are working in unison should help. After successive good monsoons, food inflation should remain benign. With our current account being in surplus, the pressure on the currency is low and we should expect the rupee to at least remain stable vs the US dollar and hence rupee depreciation-related inflation should not be there. Also, as the economy comes out of the trough, there is excess capacity in India and globally.

Hence, except for spaces where import duties have gone up, overall manufacturing sector inflation should be low. Hence, there is a high chance that in spite of benign monetary policy and reserve money expansion, the country will see low inflation sustain for a long time.

Hence, over the medium term, there is a great chance of inflation remaining low, monetary policy being benign and accommodative, interest rates sustaining at low levels and growth gaining momentum on base effect, and also on new policy measures.

All of the above bodes well for equities. There would be hiccups on the way, but we do expect valuations to sustain given lower interest rates and benign liquidity and the strength in the economy.

(Prateek Agrawal is Business Head & CIO at ASK Investment Managers. Views are his own)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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