Did the 300 plus seats projected by the exit polls for BJP and its allies come as a surprise for the market?
Many people in markets were not expecting a clear majority. In some quarters, it was believed that it could be a complete coalition kind of arrangement. So from that perspective, it has been a surprise. People are looking for stability and continuity and so it was a pleasant surprise.
Many people were under-owning stocks and there were short positions as well in the market. That is why you see a pent-up demand and a quick rally. Going forward, the market will consolidate but the underlying trend will be bullish because the Indian economy is well placed for good growth. A lot of hard work was done under NDA-I in terms of reforms — the IBC, the bankruptcy law or GST and many other reforms. There was also the demonetisation impact on the financialisation of savings.
All these things will have to play out and RERA, real estate and other reforms will have their full impact as we go forward. The government also would have learnt many things that how things work in the system that is on the internal side.
Then if you look at China-US trade war, that can be beneficial to India because India can become the sourcing as well an indirect beneficiary of this. Not only that, China has been the largest recipient of foreign capital and foreign investments. China’s infrastructure investment is saturated and therefore India becomes by default the largest destination or the most favoured destination for capital.
The only concern that most foreign investors had was who will form government after election. If on 23rd that gets sorted out decisively, then there is no reason why India will continue to attract a good amount of foreign capital. Also, after demonetisation, the flow of domestic savings has gone into more productive assets like mutual fund and equity. We must understand that when the savings go to real estate or gold, they are unproductive sectors. It goes more like an investment. But when it goes to say stock market mutual funds, they encourage equity building, capital formation in the form of equity which can attract more debt capital. So that, basically can attract more companies to expand, go to capital market, raise more money and in turn generate jobs and employment.
So from that perspective all these things put together we can look forward to a much stronger economy and much stronger markets in the next five years. I cannot really predict on a week to week or day to day basis, but if you are a long-term investor, you have to invest now and wait for three -five years and then you will have good returns.
The market has practically doubled since 2013-2014. The benchmarks and broader markets have gone higher. When you interact with overseas investors like Prem Watsa, what are you gathering on the flows front potential for next couple of years? Domestic flows for last six months and overseas flows for over a year did get stalled. Could that narrative change?
For sure, the flows will become stronger and a lot of foreign capital has been on the sidelines. They are desperately looking for high-return good-quality investment opportunities and within emerging markets, India stands out for political stability, high quality judiciary and good quality entrepreneurs who can generate good wealth. There have been concerns.
What happens when somebody looks at Indian economy? It is like an elephant and people look at certain things and they are disappointed that private sector capex is not happening, jobs are not being created., some of the economic macro numbers are not good. But if you look at in terms of pure observation, then you go to restaurants, you go to hotels or airlines, these are the key indicators of services. You will find that they are all running to capacity. I am talking about not only smaller, mid-sized hotels. You can see the general buoyancy in the economy. But at the same time, some segments are impacted.
What has happened is the economy has changed in terms of structure because earlier the growth would mean large investments in factories. Somebody sitting over a large steel plant or a large tyre plant or a large cement plant. The world has changed. There are two things happening. One is that most industries and services are learning to be more productive and that means they have a lesser requirement of capital. In a way, capital productivity is a surrogate for capital investment.
Supposing I could do a certain amount of business with say 100 people in an office and I can do twice the business with 100 people, I might not grow the number, the size of the office but still the business is growing. That has happened across the board using technology, which has been used everywhere universally in different forms. So that is one. The impact of technology on productivity has reduced the demand for capital investment by the private sector.
Second, our economy is dominated by services, almost 65% of economy is services and also growth in the services segment is faster than the agriculture industries. There the minimum economic scale is smaller and the segment that grow are also very different from what you used to see traditionally and say this is growth.
The mega rally which we saw was on the back of very select stocks. Do you see that rally going forward if a stable government comes back or the similar kind of mandate comes back because broader markets have been beaten out of shape for the last 15-18 months?
It is a very valid point. After the exit polls, the first flow of money will be in largecaps or liquid stocks because people can quickly build positions there. They may buy Nifty and therefore a few stocks that dominate Nifty might move along with the Nifty but the flow of money is not going to get over in one day’s time.
As people get time to think and plan properly, they will find values in midcap and the stocks that have beaten down. So, this rally to my mind will spread wider and that is where there is opportunity for investors to look for midcaps which have values and build positions there. They will probably see a lot more traction there.
After the election results are out on 23rd and 24th and hopefully there are no surprises vis-à-vis say exit poll, then I think then in the weeks to come you will see that rally broad basing in a very nice manner.
You have wider business interest now. How did you observe the five year of this government and if they do come back in power, which are the areas you think they will definitely focus on which could be the areas of progress on the reform end?
In last five years, their intent was right. Major reforms got off the ground and also corruption at the top level was reduced or removed. But what happened is that there was one important thing for us to see, that entrepreneurs and large business and large industries do not live in fear. Many times perception becomes reality and people forget the facts. That should not happen. So when you want to put fear in people who are hoarding black money or doing things the wrong way, the way that administration works, the fear can spread to the right kind of people as well and basically fear psychosis is not good.
This government in five years did many good things but looking back, it is not surprising that many things are still in the pipeline or have not played out fully or are work in progress.
They took a little longer than what government would have expected and in a way then this same government coming back to power is good because then they can continue their unfinished agenda and take it to logical conclusion so that people can see a lot more benefit.
Let’s take a small example. For a tax reform like GST, it is impossible to say that in one or two years, everything will settle down. As long as you are ready to listen and fixe the problems, let it take three years-four years but this is something which will really go on for more than 50 years. But once it starts giving results in terms of better taxes, better compliance and better logistics and less wastage in terms of goods movements on the border, then the economy sees the benefit.
Even the bankruptcy law took off very well but there are still some teething issues that need to be sorted out. I have a feeling that Mr Modi’s second term was far better than the first term. In the first two-three years, you are just struggling to settle down. I have a feeling that a lot of things have started well but the fruit should appear in the next five years.
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