What do you think are the most important reforms required in the capital markets that the new government should focus on to provide a direction and boost to the capital markets?
I am of the view that the policy framework must address the macro-level issues to boost confidence in the economy. The economic growth happens either through accelerated investments or through higher levels of consumption, which increases incomes and investments.
In order to give a policy-level boost to the capital market, the new government should abolish short-term capital gains tax on equity investments. A lot of the unholy overseas structures for investments into India will also disappear with this initiative. Today the investors are worried about harassment by the I-T department and are faced with unmanageable amounts of paper work, inspections and investigations.
The market should be thrown open to NRIs without putting a number of conditions as it is today. Similarly, capital market should be thrown open to foreign investors — individual and institutional, as long as the money flows in through regulated sources. As of now, the conditions attached and procedures to be followed are not simple and are suitable only for professional investment institutions.
What are the three things that come to your mind that lagged from the policy or regulatory front over the last five years and that affected the markets and
First and foremost, the country should have a functioning Parliament which was not the case over the last few years that ultimately resulted in the complete paralysis in law-making. A lot many bills, including many that are important for managing the country’s economy have been pending for years.
Secondly, there must be a decision that policy amendments will not be with retrospective effect. Of late there is a report that the I-T department has started issuing notices to all unlisted companies that issued shares in the past five years at a premium, asking them to show why the premium should not be taxed as income of the year!
Thirdly, settle all the environment-related disputes for the projects that have been started but are stuck due to a lack of policy clarity about the future. Above all, the single most definitive factor that adversely affected foreign direct investment into the country — ‘The Great Indian Corruption Story’ — must be reversed once and for all.
Jobs in the financial services industry got affected over the last five years, how do you see the prospects for the same going forward?
I am of the view that at least half a million jobs were lost in this industry during the last five years, except the banking sector which was a net recruiter. If we take the insurance and investments industry, not only were jobs lost, but these otherwise attractive destinations lost their appeal among job aspirants as well. Once the overall business confidence grows, the financial services industry will be the first to regain its lost glory and will see creation of millions of jobs.
While IT, FMCG and pharma have done well in the past, where do you see growth coming from over the next three to five years and do you see the current momentum continuing?
In my view the turnaround of the business cycle will happen if we get a stable government and hence all the cyclicals will do better than any other sector. Pharma and IT are likely to underperform in relative terms if the economy turns around, whereas FMCG sector will do well. Investors must wait for couple of weeks for the election results and then bet on the cyclicals.
After five years of bad markets, there is lot of money in the hands of domestic and foreign investors who are waiting for the turnaround to park the money in equities. Such turnaround can come through triggers like an election result which is expected now. If the election results are as expected by the market, this momentum seen during the last few weeks will continue for many years unless we again seriously mess up with policies.
Where do you see Sensex or Nifty in the next five years?
If we apply the rule of 15 per cent annualised returns from equities, an investor who invested in January 2008 at Sensex levels of 21,500 should see a Sensex level of 51,000 for exit today. As the market now generally expects, if the vibrancy gets back and the bull run starts, the Sensex levels will breach 60,000 points in next five years. When the media writes about Sensex and Nifty hitting records these days, one important point is missing. We are comparing with 21,500 Sensex levels of 2008 which is nominal in nature and if we just apply 10 per cent annual inflation rate the real Sensex level is around 12,000 points now.
It is always said that investors should invest with a three to five year horizon. However, the last five years have been a waste for investors in a broader sense. How would you justify that?
It is now 30 years since the country started opening up the economy in 1984 with the first budget of the Rajiv Gandhi government that was presented by the then finance minister VP Singh. Since then, the capital market played a major role in pushing India into the group of fast growing economies of the world.
During the last 30 years, it is for the first time the markets had a block of five years of bad markets now. Except for this period, the three to five year investment horizon worked in India. But we must reckon the fact that when the country was exceptionally weak in perceived governance, such exceptions do happen and that only proves the general rule right.