The year of execution

Updated: Dec 31 2013, 15:43pm hrs
SubGiven the high inflation, the year may exhibit preference for a stable rather than volatile interest regime.
U nlike the usual, trying to paint a picture for the year on the back of a tough economic environment that is perceived to be low growth is quite difficult.

We are currently living in a low growth environment and looking for growth in the coming years. No one would disagree that we need to have growth in the economy, better employment and aggressive investment in infrastructure.

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However, one thing that has emerged in the recent past is that the VUCA world is going to exist in days to come. This is nothing but Volatility, Uncertainty, Complexity and Ambiguity (vuca). Looking back, none of these factors have been in short supply. We have had enough of it, as a result of which we are now debating how things can shape up for the economy and in turn for investors of all kinds.

During uncertainty, what works best is to maintain the discipline of consistently getting the basics right. The year gone by brought on multiple issues to worry about. One of the most prominent ones was the twin deficit. Fiscal deficit and CAD were identified as the main problem from the overseas investors perspective.

The challenge was to retain the India sovereign rating at investment grade. We have always believed that India Inc acts fast and takes tough steps whenever the external balance gets disturbed. Last year, many steps were taken to keep the twin deficit at a desired level.

India Incs commitment to keep the fiscal deficit below the red line at the cost of growth was a tough decision. However, India did not have much of a choice to do the same as economic sentiment continued to remain weak.

On the currency front, we averted a big crisis when the rupee was marching towards 70 to the dollar. While this benefitted exporters on one side, imports (especially oil) remained under pressure. However, a change in the oil price mechanism saw the burden of oil price movement systematically and periodically passed on to the consumer.

I believe the consumer too is smart to cut down expenditure where his pocket pinches beyond a point. While in this process, CAD came to be contained, progressing well towards the targeted number, there sprung the need to increase the flows through FDI.

While the year gone by has not produced much from the economic growth point of view, the Indian economy witnessed major reforms in the form of the Land Bill Reform, change in the Companies Act, passage of the revised RTI Act and passage of the Lokpal Bill, among others. These are some of the governments initiatives which might help remove hurdles as we move forward. It will also give enough time to the policy makers to get back on the growth path.

We, therefore, believe that the year 2014 and beyond would be the year of execution. This essentially means finding a solution and putting the right road map to bring down inflation. While it is easier said than done, the scope for us to bring in necessary efficiency in the supply chain management of food articles is very high.

Any concerted effort will bring the necessary result, however, this is possible only through government initiatives. Secondly, in 2013 we saw some progress with respect to clearing the hurdles for India Inc in various domestic projects which were struck. Had these projects progressed as planned, we would have in all probability not have witnessed a shortage of power across the country.

Now, having known the problems and having built the necessary power producing capacity through few players, any right and timely tweak in/of the policy would result in an increased level of productivity, thereby reducing the shortage of power.

Therefore, the year 2014 could clearly see a reasonably good progress in the area of investment mainly in the power and mining sectors. Given the rupees depreciation in favour of exports, a recovery in the US economy should augur well for exporters. The very fact that US tapering has begun, is some sense of confirmation of growth coming back.

Unless the economy is in a good shape, no regulator will remove the support that aids growth. Therefore removal of US tapering combined with a stable monetary policy rate with a low interest regime should result in a spike in exports for India.

Lastly, in any economy which is returning to the growth path, a few asset classes are bound to do badly. One such asset class which may bear the brunt this year is gold. The continuous underperformance of this asset class could drive away investors from investing in gold to other asset classes such as equity.

It is also believed that real estate as an asset class might see the pressure due to the increased level of supply and moderated demand from investors. In such a scenario, equity as an asset class can be expected to do better.

Any fundamental change post the pain period will result in better corporate fundamentals. Secondly, global growth will further drive India Incs benefits from exports. A change of guard at the central government will bring the necessary focus on execution, which might result in growth coming back.

Therefore, one question that we may have to ask ourselves isare we prepared for a positive surprise on the backdrop of the challenging periods of the last few years One should not underestimate the fact that being prepared for a positive outcome is also equally important as being prepared for any potential downside.

I see a similar situation in investors being underweight in the equity asset class. I would assume the year ahead might see a shift towards equity and at the same time, the rate of growth in fixed income investment opportunities would also continue to remain attractive.

Given the high inflation, the year may exhibit preference for a stable rather than volatile interest regime. This essentially means that both equity and fixed income asset class of mutual funds can be expected to deliver satisfactory return to investors.

Let me end by saying that we learn from the past, live for today and hope for tomorrow, but one thing that remains constant is the timely question about our preparedness for both negative as well as positive outcomes.

A Balasubramanian

The author is CEO, Birla Sun Life Asset Management Company