If you are worried about your equity portfolio, you are not alone. Whether or not to continue SIPs and whether or not to get out of the market would have been the most asked questions in almost every webinar that I have been a part of since end March 2020. The fear is not just about the market crash in March, but also about the possibility of a global recession and the ability of India’s already slowing and now negative growth to recover from this shock. It is a valid fear and unless India is able to get its growth back on track, targeting at least 8%, if not more, the fruits of demography, of a geopolitical advantage today and of servicing a large domestic market will all be frittered away.
Economist and former Reserve Bank of India (RBI) deputy governor Rakesh Mohan wrote in a superb 2019 paper, titled Moving India to a new Growth Trajectory: Need for a Comprehensive Big Push (read it here), that to get to the needed 8-9% GDP growth, other than a push to financial savings, there is a need to “revive animal spirits in the private sector…particularly in internationally competitive manufacturing sector”. He wrote that there seems to be an acceptance of the fact that India has missed the bus in manufacturing but that there are plenty of buses still to board, if we make the needed changes in regulatory structures that impede enterprise, both Indian and foreign, from making investments in manufacturing.
India today looks as if somebody stuck a pole into a beehive and shook the bees out of their daily routines. You don’t mess with bees’ routines for they get really angry! Indians today are angry over what they perceive are the acts of a “fascist” government, including raising hostel fees that have been stagnant for over 40 years and have no relation to the current levels of purchasing power. Others are angry at those who are angry. Yet others are letting off steam unrelated to the current issues but maybe just the stress in the extended family—why waste a good fight? Most others are generally feeling bad about the news of a slowing GDP, a consumption pull back and an overhang of bad news about the economy. One part of the country, however, seems to be immune to this anger and grief—the republic of the stock market is literally on its own trip and is hitting new highs every other day. What’s going on?
While the rain did its best to derail the plans, the Mint Roundtable, part of the sixth edition of Mint Mutual Fund Conclave held in Mumbai on 26 July, on the state of the economy saw a full house. We were debating the key issues that face the economy with thought leaders in the financial sector and Bibek Debroy, chairman of the Prime Minister’s Economic Advisory Council. It was like a Delhi meets Mumbai kind of an evening. Constrained by Chatham House rules, the finer details of the discussion are not being put in the public domain, but here are the broad areas of discussion.
It looked as if the rain would derail the annual Mint Mutual Fund Conclave in Mumbai where every year we debate issues related to the industry and investors. This year since we had the chairman of the Prime Minister’s Economic Advisory Council, Bibek Debroy, giving the keynote, we decided to have a closed-door roundtable where he would interact with some financial sector leaders to have a candid conversation about issues like the real GDP numbers, the budget, the slowdown that industry says is palpable and the changed rulebook of this government. There is worry among employees, investors and the industry on the slowdown in the economy. Wealth managers peg their advice and asset management decisions on potential growth, and if this number is in doubt, the ground moves from under the feet. But as the rain did not keep away the financial sector leaders or the delegates, there was an animated debate. Here are a few takeaways from the conversation and the event.
Now that the election is done and dusted, all eyes are on the Budget and the reforms that the government needs to front load. The way a market is structured reveals a lot about the stage of development of the country. Indian regulations for markets and money have evolved piecemeal, solving problems as they came along. But the rules that worked when the economy was at $500 billion are already under stress as India rises to hit $3 trillion. The journey to $5 trillion and then double of that will need new rules of the game. Here are three areas that are crying for change.
One, as India moves from a financially repressed economy, the rules around forced investment into government bonds will need to change. Financial repression is when the government uses its dominant position to put in rules of the game such that it appropriates a bulk of the savings of the nation. It also means that the government, through the central bank, uses its power to set interest rates that are below the inflation rate. In the first case, household money finds its way to government bonds through banks and insurance firms. In the second, the government is able to inflate away its debt. Look at the rules for Indian banks and insurance companies and you see a text book case of financial repression. Banks are currently forced to keep 19% of their deposits in government securities as part of the statutory liquidity ratio (SLR) requirement and another 4% currently as the cash reserve ratio (CRR) requirement with the RBI. So of every ₹100 of deposits that a bank collects, it cannot put ₹23 to use (for lending). Insurance rules are similar. A bulk of the ₹32 trillion assets under management of Indian insurance firms buy government bonds. Notice how tough basic reforms have been in both banking and insurance in India, while stock market reform has been much easier. But this was the paradigm of a low-income, low-tax-paying and low-growth economy. A faster growth with more people paying taxes that result in a higher tax-GDP ratio will give the government the elbow room to relax these regressive rules that punish household savings. The Narendra Modi government should rethink these rules specially since an inflation-targeting central bank will keep inflation under the lid and the Fiscal Responsibility and Budget Management (FRBM) will keep deficits under control—the need for forced household savings will reduce. A rethink in investment rules in insurance, in particular, will open the door for change that stops the huge mis-selling that is in turn driven by high commissions. To read this piece click here
As I breezily recommend an index fund to anybody who is risk averse and still wants “better” return than a bank deposit, I forget to take into account a slice of the reader and viewer segment which does not know the assumptions or the formulae behind this sweeping prediction of the future that I like to make: Indian equity will give an average return of about 15%, year-on-year (y-o-y), over the next 10-15 years. You’ve heard this statement over and over again so often that it almost seems like a basic rule. But it takes a vigilant reader of the paper to ask the obvious question: what is the basis of this statement and if past returns do not guarantee future returns, how can we predict what the markets will do in the next few years? Writes Anantha Padmanabhan from Bangalore: “Today the economy is booming, however, over the next 15-20 years is it feasible to have such a year-on-year growth of the Sensex (and thus the economy)? Historical data over the last 15 years is fine, but going forward I am a little sceptical. What makes us say that the markets will give a 15% year-on-year return over the next 20 years?”