Is the worst over ??
“Darkest hour is just before the dawn” is no ordinary saying . Its soothing effect in a most depressive settings can’t be understated . However for India , law of diminishing returns has caught up with this phrase . Not without reasons , of course . India has seen many false dawns come and go , still awaiting that ever elusive real one.
After three successive years of anaemic growth , forthcoming year (fiscal 13-14) may hold some promise for the upturn . With base effect kicking in along-with hope for reversal of interest rate cycle and recovery in investment cycle , chances of real dawn showing up have never been better . But nothing can be taken for granted given the precarious nature of twin deficits ( Fiscal and Current account) and the stubborn nature of the inflationary trend .
Sustained rate cuts are key to reviving growth ( esp in the investment demand) . RBI is keeping a tight lip while pundits have been busy pumping predictions on this . While inflation trajectory has started trending downwards ( as reflected in the latest WPI data) , the real comfort for RBI can only come from the quality of the fiscal adjustments that the FM has undertaken in his financial Budget . More than the headline fiscal deficit number , profile of expenditures hold the key for future rate cuts by RBI . There are already murmurs in the Mint street that Govt. might fund its most ambitious ( and most populist ) food security bill by cutting down plan expenditure ( capital investment outlays), while projecting a market friendly headline fiscal number of sub 5% . Such a Machiavellian approach might at best satisfy rating agencies , but risk inviting RBI’s ire . But political compulsions ( with elections not far away) might tempt the govt. to throw cautions to wind .
The reasons for RBI’s discomfort on such approach are not difficult to fathom . Diverting funds from plan allocation to social programmes will fuel food inflation while hurting industrial growth and thus worsening already fragile inflationary trend . “If spending on social schemes comes at the expense of capital expenditure, it will be bad,” an official with direct knowledge of policy making told Reuters. “Inflation will go up, and there will be food inflation from the demand side.”
Given the high possibility that Govt. might risk RBI than the election prospects , it is highly probable that sustained rate cuts are sometime away . This means , RBI on its part will risk growth rather than inflation and hence will most likely take a pause after one or two more cuts of 25 bps . If that were to come true , we are , in all probabilities , looking at another year of slow growth esp. in investment / capex demand . That is not good news for investors who are hoping for the elusive recovery in capex .
With one more year of pain ahead in capex and investment cycle , investors need to take that extra caution while investing in beaten down investment (IIP) stories !!!.
Happy Value Investing !!!
ArunaGiri . N