Indian economy looks strong, despite risks ON FIRM GROUND : Hindustan Times

Although the Sensex dipped this week on weak corporate earnings and foreign fund outflow, the economy looks fit for upcoming days

IN INDIA, IMPORTANT NUMBERS SUCH AS CAD AND INDIRECT TAX COLLECTION ARE GIVING POSITIVE SIGNALS UNLESS THERE IS A MAJOR CRISIS SUCH AS A BURSTING BUBBLE OR GREXIT, INDIA SHOULD CONTINUE TO ATTRACT INVESTORS

FOREIGN INVESTORS’ sale of equities brought down Indian stock markets last week, with the Sensex losing 343 points to close at 26,425. The selling was spurred mainly by two factors. Firstly, lacklustre corporate earnings, for instance, the Motilal Oswal universe of companies reported a 10% decline in Q4 profits and secondly, the rise in bond yields in the US. This makes bonds issued by a government relatively more attractive making potential foreign investors opt for these.

Part of the reason for the dip in corporate profits was due to their overseas acquisitions not paying off. Large impairment charges have also been born by companies such as Tata Steel, Bharti Airtel, Tata Global. Essar Group, Coal India etc, impacting their profits significantly. Vedanta’s purchase of Cairn India, though not an overseas transaction, resulted in the highest impairment loss of 20,000 crore! Some acquisitions, however, have been successful, such as Tata Motors’ acquisition of Jaguar, which now contributes to its profits.

T he t ravails of Nestle India, which is battling the controversy of excessive lead in their noodles is known to everyone. The stock has taken a beating, and Nestle India’s profits could be hit by upto 25% if the ban on Maggi continues. Nestle has filed a suit in the Bombay High Court to stay the ban, and has got a certificate from a government agency in Singapore as a testimony to the quality of its noodles.

Quantitative easing (QE) programmes by central banks, seeking to spur investment and consumer spending, have not worked. On the contrary, low interest rates have caused fixed income investors — or safe investors — to take risks. If a US citizen, who, for example, has saved $10 million for his retirement hoping to get an annual income of $50,000 at a 5% interest on his deposit, now finds out that at a rate of 1% he would get only $10,000 per year, he would move a part, or all, of his savings into other assets in order to make up. This creates bubbles in the other asset classes.

The Chinese stock market appears to be one such bubble, having more than doubled in the past year. A lot investment in its market is borrowed money; margin financing has gone up 5 times last year, to $325 billion.

It is not only monetary policy, but also fiscal policy, that leads to unintended consequences. Profits of overseas branches of US companies, for example, are taxed only if the profits are brought back to the US. As a result, companies such as Apple, Google, Oracle, have a cash stash of over $ 500 billion in overseas subsidiary profits which they use to invest in treasury bonds, instead of investing in plants, because the amount would be taxed if brought back.

In India some macro numbers are showing positive signs. The CAD (current account deficit) has dropped in Q4 to just 0.2% of GDP — an additional $7 billion in forex kitty —thanks to fall in prices of crude oil and gold imports.

Another good sign is the increase in indirect tax collection by 39% in this fiscal year. This was made possible by higher excise collections.

However, the chief economic advisor rightly pointed out that but for the hike in excise on fuel, the clean energy cess and removal of certain concessions the increase would have been 12.6%.

The government is trying to bring in policies to ease doing business, so as to spur manufacturing and create jobs. It is also set to overhaul labour laws and make them more flexible.

So the India story still looks good. The World Bank expects India to grow at 7.5% even though it has reduced estimates for global growth.

So, unless there is a major crisis such as a bursting bond bubble ( bear in mind that prices have started falling) or Greece exiting the euro, India should continue to attract investors.

(J Mulraj is a stock market commentator and India head for Euromoney Conferences;

views are personal)