2014 –UWC Budget Event Summary
The UWC event ‘Restarting India’s economic engine’ had three keynote speakers from diverse backgrounds viz. Mr. Swaminathan Aiyar – socio-economic-political commentator, Dr.Subir Gokarn – Ex.RBI deputy governor & Mr.Sankaran Naren – Chief Investment Officer of ICICI Prudential Mutual Fund.
The first speaker Swaminathan Aiyar, covered the economic scenario during the UPA 1 and UPA 2 regime pointing to some of the reasons that led to the sharp decline in economic growth. The collapse in productivity was the chief reason attributed to the growth rate halving over the past five years. Domestic savings falling faster than the investment slowdown led to a record current account deficit in FY13. This has also translated into high consumer inflation of over 9% for five years. The UPA 2 regime was referred to as a protectionist one providing right to food, education and work but still enraged the voters on issues like corruption, price rise and weak growth.
The global slowdown was attributable only to a third of the nation’s challenges while the remaining two third was largely on account of internal mis-management. High subsidies stoking a higher fiscal deficit and inflation, rising MSP prices but falling productivity, large scams and policy paralysis were some of the main sources of challenge for the economy. In his opinion Chidambaram’s second stint as the finance minister in UPA regime failed to achieve the targeted objectives as all the measures adopted were too little and too late. Fiscal deficits were pruned by reducing plan expenditure that would weight adversely on the future growth potential.
The speaker referred to the current regime as that of a new license permit raj that resulted in challenges in obtaining environmental, forest and land acquisition clearances. The judicial system has stopped mining in iron ore, coal and sand leading to significant impact on industrial output and the trade front. While a number of new rules and laws have been enacted, the National Advisory Council & Parliamentary Standing Committee has distorted the balance between protection and production.
The rise in the popularity of Kejriwal and Modi were led by the voter desire for clean and decisive governance. Current opinion polls are pointing to Modi gaining momentum while Kejriwal was losing momentum. He also opined that a non NDA led government would turn unstable with a life span of 12 to 18 months as there would be multiple candidates for Prime Minister. Currently he states the odds of a Modi led BJP government at 65%, a 15% chance of a BJP led government without Modi and a 20% chance of a third front.
The speaker believes that Modi would face multiple challenges if elected to power as the powers of the centre are limited in many areas especially in state controlled areas. His ability to run the government is subject to changing his style of leadership from an individualistic to a participative one. He expects Modi to strike some balance in the current populist policies – subsidies, spending patterns, etc. and would emphasize on generating jobs, good infrastructure and government services. Overall he believes that better governance and ethics would reduce the court activism in the affairs of the nation.
Finally he believes that India has strong fundamentals and has huge potential by fixing the new ‘license raj’. He also highlights the fact that fast growth even in BIMAROU states were driven by strong CMs and not the PM. Decentralization would drive faster growth in states. The current structural problems have depressed industrial growth but a reduction in corruption and improvement in governance could lead to a brighter future with a possibility of a 7% growth rate over the medium term.
The second speaker for the day Dr. Subir Gokarn focused his discussion on the nation’s growth challenges and the possible policy responses along with their strategic implications. The economic growth in his opinion is interplay of global and domestic conditions. The foundation of the strong growth during 2003 to 2008 was cemented by a benign inflation, rising investment and savings and improving fiscal conditions with government spending shifting towards asset formation.
This resulted in an improvement in the growth potential but the complete reversal of these phenomena led to a deterioration in the current account deficit and the balance of payments situation in the post crisis period. The speaker pointed out that minerals (crude, gold, iron ore and coal) have played a central role in exacerbating the current account deficit and weakening the currency. The key focus areas for stability in the macroeconomic front according to Dr. Gokarn were to contain inflation in a sustained manner, manage the fiscal deficit by focusing on the quality of fiscal consolidation (increasing capital expenditure).
The structural constraints to growth in the economy are from three areas viz. food, labour and infrastructure. Food inflation especially the protein related articles have experienced a high rate of price growth in the last ten years as disposable income has increased sharply. The effect of global warming in structural reduction in the average rainfall has played a crucial role in the dynamics of food prices in the country. Increased focus on water supply management, food storage and distribution is imperative for food supply management and lower food inflation remains a key to improve the growth-inflation balance.
The shift in employment providers in the economy has been marked over the past two decades with services sector contributing to most of the incremental job creation. However the large share of casual labour even in urban segment remains a cause of concern as it renders instability to the income of individuals. Also productivity improvement has been marked in the services segment followed by the industrial segment while the agricultural segment has remained largely unchanged over the past two decades. The sharp rise in rural wages could be traced back to the implementation of MNREGA during the UPA regime.
Dr. Gokarn further stresses on the need of favourable demographics as a key driver of growth but the economy faces the challenge of creating productive jobs to a large segment of the population and existing labour force needs to be transitioned out of agriculture into industry / services by enabling efficient skill formation. The combination of high wages in agriculture and low productivity would be inflationary. The state of infrastructure in the nation is weak in the area of roads, rail roads and ports. India ranks well below China in all aspects of infrastructure reducing the competitive advantage in the global market.
Dr. Gokarn pictures three different growth scenarios from the best case scenario of 8% over medium term to a base case scenario of 6.5% and the worst case of 5% over the medium term. He stresses on the significant need for improving infrastructure to benefit from the favourable demographic advantage.
The final speaker of the day Mr.Sankaran Naren shared some thoughts on investing. They represented some basic rules that one needs to keep in mind while investing. The entire idea of investing revolved around the idea of asset allocation / asset re-balancing. The first and foremost thing to remember is the willingness to approach investments from a contrarian perspective and not invest in all securities available in the market. Investing into asset classes that have performed badly in the recent past and disinvesting in an asset class that has performed very well in the past would address the aspect of asset re-balancing.
Further the asset class to invest should be the one that is out of favour amidst major class of investors viz. the domestic and foreign institutional investors. He stressed on the importance of valuation to remain the key factor for asset allocation decisions. He also mentioned about some guidelines to invest in the major asset classes. Equity assets should be bought during periods of low GDP growth (generally leading to lower earnings multiples) and sold during periods of sharp improvement in the fiscal position. Similarly fixed income assets should be added when current account deficit is high (reflecting in higher yields) and pare down exposure during periods of improving industrial growth. Finally investments into gold should be contemplated during times of optimism and sold during times of pessimism (gold price peaks during periods of high uncertainty).
These were some of the simple rules that would help investors in allocating their savings and benefit from above average returns over a market cycle.
The event came to a close with a vote of thanks to the audience and the sponsors.
United Way of Chennai’s event on “Restarting the Indian Economic Machine” had HDFC Mutual Fund as the Title Sponsor and HDFC Bank as the Principal sponsor.
Wealth Advisors (India) Pvt. Ltd was Knowledge Partner and Sheraton Park was Hospitality Partner.
Associate Sponsors included Avendus Wealth Management, Deutsche Mutual Fund, Value Invest, DSP Blackrock Mutual Fund, Birla Sun Life Mutual Fund, ICICI Prudential Mutual Fund, Chola Wealth Management, Reliance Mutual Fund, Axis Mutual Fund, HSBC Bank and City Union Bank.