Ronald Coase once said, if you torture the data enough, it will confess to anything. But he seems to come awfully short when it comes to economic data for past five years for India. Whichever way one tortures, needle hardly moves from that one indication that the economy hasn’t done much in the last 5 years. GDP growth was at 7.4% in 2014 and now it is at 7.1%. Share of manufacturing has been languishing around 15% level for last 5 years from the peak of 17.5% in 2007. Capital investment has fallen from 34.27% of GDP in 2014 to 30% level in 2018. Besides private consumption and govt. spending, much of the growth metrics has been drifting directionless since long. Yet, when this govt. came to power in 2014, one thing that was in abundance (and went unchecked) was hope. As we look back at the end of 5 years, the question we are asking is not what went wrong (some missteps are well debated and documented), but when will the payoff be for all the incremental reforms this administration has painstakingly penned over last 5 years?
Before that, here is the quick recap of those reform measures which have gone off the radar of investment community amid the slowdown and election noise.
IBC (Bankruptcy Code), one of the most under-rated reforms of this administration, will have far reaching impact on the structural shape of the growth in the coming cycles.
MPC (Monetary Policy Committee), the key reform that has the potential to transform the trajectory of inflation & interest rates and hence the trajectory of Rupee.
GST, RERA (Real Estate Law), DBT (Direct Benefit Transfer) the coherent strategy that runs seamlessly across these reforms to structurally swell the tax base and tax/GDP ratio to significantly higher levels.
These reforms, in isolation, may not seem big-bang, but when it rolls together along-with the expected, yet elusive, turn in investment demand, can create a big snow-ball effect for the growth, esp. when NPA and overcapacity issues are behind us. Of course, this is not a new expectation. Many, including this column, expected this effect to come into play in early or late 2018 itself. But, uncertainty around general election coupled with EM outflows in 2018 had caused growth to sputter in the short-term resulting in delay in such a play.
But here is where the catch is. Longer the delay, the stronger the snow-ball effect that will come into play. From this perspective, growth pattern that will emerge post-election could be diametrically opposite to what happened in the last election. In the last election, markets ended up over-rating the political outcome as growth across the term came lackluster. This time, it might end up under-rating the extent of growth that will get galvanized by the foundation-work (above listed reforms) that has been laid in the last five years.
This prognosis is not of course without any caveat. There is a risk of recession looming in US next year, if not this year. While that could take some shine off from the stellar story, it is unlikely to have lasting impact given the huge catch-up the economy has to do when it comes to investment cycle, as it has to offset the dry run it had, not for short-while, but for more than half-a-decade.
As someone wise said, markets are extremely efficient in the short-term while leaves a lot to be desired when it comes to long-term. It over-rates short-term developments while under-rates long-term implications. In the broader segment of small-mid-caps and in select pockets of large caps, markets have left lot on the table as it is in no hurry to discount the golden times that is ahead.
Happy Value Investing!!
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