Slower growth recovery may prompt a potential rethink of government’s policy stance away from fiscal consolidation towards “reflating” aggregate demand, says a report by global financial services major UBS.
The 7th Central Pay Commission (CPC) is implicit to this change in the country’s policy framework as it amounts to an increase in government support for consumption at the expense of planned fiscal consolidation, it said.
The report noted that investors are either “unaware of or ignoring risks” from potential change in policy stance.
“Our recent discussions with investors indicate some complacency,” it said, adding that investors are presuming immediate CPC implementation as a given and looking at such a policy shift positively, ignoring risks to macro stability.
Moreover, investors looking at APAC/GEMs are largely unaware of any such policy shift or haven’t realised the full impact as they are looking at the CPC narrowly from central government’s fiscal perspective, said Gautam Chhaochharia, Head of India Research, UBS, and author of the report.
According to UBS, India’s macro backdrop is very different now as against 2008, the last time India adopted CPC and expanded fiscally.
The report noted that financing the widening current account deficit in the present environment may not be as conducive.
Moreover, international investors in government bonds have increased many-fold and they arguably care more for macro stability when compared to near-term growth and politically, national election was in 2009, while next one due in 2019.
On RBI’s policy stance, the report said that it is likely to be a “staggered/delayed/diluted” implementation and 75 bps rate cuts by RBI in 2016.
The report further noted that consumption boost is not guaranteed even with CPC, neither is it surely sustainable beyond 2-3 quarters.
“Markets may be ignoring this and also risks to currency / inflation. Any delay/dilution to CPC, as per our baseline scenario, would be a negative surprise for specific sectors/ stocks,” Chhaochharia said.
UBS end-2016 Nifty target is 8,200, while, its downside scenario implies end-2016 Nifty of 7,000.