Connecting the dots…

Deciphering the Big Picture !

It has been a  year since this new government took office . Govt. unveiled a massive media blitzkrieg   to morph this  milestone into a mega event . Hi-pitched  adulations marked the anniversary celebrations.    But , on the ground , growing disillusionment in the broader corporate and investment world has taken much of the sheen off the celebrations  . Campaigns such as “Make in India” which is sweeping in scope , but short on specifics , have only added to the confidence woes . Rarely any govt. had taken oath amid   heightened expectations like the current government .   With reality falling far short of initial expectations , hope has given away to a mood of  despair .

Is the shine really off or should the  blame rest on myopic short-term view   . Is the consensus view of investment community missing the wood for the trees . Behind the growing impatience for a quick turnaround , savvy investors shouldn’t fail to fathom the larger footprint that is being laid out.  Much of the investment and business community complain that there is too much of piecemeal legislations and reforms that do not add up to any bold big picture  . That is barely the case if one moves beyond the surface . Digging deeper , one can see the deft designs behind the seemingly unconnected reform measures .

Let us start with what ails India’s macro that mars it  from achieving its long-term growth potential . Every time when we hit a cyclical peak of 8 to 9% GDP growth , we seem to be hitting a speed breaker in the form of inflation that puts India  back on a slower saddle . Inflation is a structural issue for India . It arises from supply side constraints in land , labor and capital (cost of capital) . If one addresses inflation issue structurally ( not cyclically  by raising interest rates) , it can structurally change India story. This is precisely what the new govt. attempts to do over time by systematically eliminating supply side challenges in land , labor and capital .

The key focus areas for this govt. have been easing land acquisitions , shifting savings from real-estate and gold ( thro’ the proposed domestic money laundering bill and the gold monetization scheme ) , rigorous auctions of natural resources ( taking discretionary power out from state and hence black money generation)   , proposed changes to labor acts ,  subsidy reforms ( effective implementation of direct benefit transfers   ) , higher allocation to rural infrastructure , capping MSP (min support prices) and  cutting allocations to free dole out schemes such as NREGA etc . All these have one common thread running across , which is addressing supply side constraints thereby structurally eliminating inflationary pressures from the economy . If successfully executed , this will go a long way in reducing cost of capital ( by structural low interest rates by lower inflation and from shift of savings to financial assets) , increasing supply of land and labor to productive areas and putting higher purchasing power on rural segment ( by wage and job growth ) .

This may not be a very bold and loud picture , but certainly a sensible big picture that can put the economy into a  sustainable  high growth orbit . As much as it is economically wise , it is also politically shrewd one   . Low inflation and rural wage growth  are  proven prescriptions for winning elections in India   . But not everything is as  rosy as it seems  . Any structural shift will need adjustments that will be painful in the short-term . Current one is no different with delayed recovery on the ground till reform measures take hold  .

For investors , understanding this big picture is critical for their  investment choices . Retail investors have to move beyond their favorite gold and real estate to capitalize on the emerging theme .  Financials and rural based themes will emerge as key opportunities for investment ideas . Markets in its myopic mood can not see beyond few quarters and hence its disillusionment .  When market loses traction on worries on immediate earning growth , it throws a brilliant opportunity for long-term investors who keep their eyes on the big picture .  It is time for bottom-up stock picking to create long-term wealth from the structural shift that is being clinically crafted by this politically  savvy government . Interesting times ahead !!.

ArunaGiri . N


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