The money manager claims that although there are many similarities in the current situation and that of financial year 2003, macros will only rebound this time and not enter a multi-year bull cycle.
With macro indicators at multi-year or record lows, forced by the coronavirus pandemic and the resultant lockdown, equity investors may be hoping for a 2003 redux that saw India’s share market enter into a multi-year bull run. However, that looks less likely this time, according to global investment manager Alliance Bernstein. The money manager claims that although the current situation has many similarities with the financial year 2003, macros will only rebound this time and not enter a multi-year bull cycle. Previously, it was from 2004 to 2009 that India saw a strong bull cycle on the back of strong reforms, after a weak macro situation during 2000-2003.
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Bernstein, in a note, said that currently everything is weak. Drawing an analogy between now and what the situation was almost two decades ago, the note added that macro was weak for several years back then, starting from financial year 1997, banking NPAs were high, and real estate was in a downturn, followed by a weak rural economy on the back of lesser rainfall — situations India is facing now too. Bernstein noted that shortcomings were tackled by various reforms back then. “It was the convergence of several factors that helped fuel a long macro up-cycle which ended post the global financial crisis,” it said.
… And how it is different
However, the biggest challenge that the current situation faces is the execution on reforms, diluting the impact of several decisions, the report adds. “The only main reform in this phase is GST — although it has not helped in increasing the tax base. Infra oriented reforms were not executed well, and it failed to increase flows from the private sector. Make in India failed to deliver,” Bernstein said. Picking holes in policy decisions, it said that India is not looking much into the future by creating its own companies, rather only some jobs are being generated. India’s decision to bring in foreign firms may help in the creation of jobs, however, the companies setting up shop in India will not be large exporters, therefore not helping the country benefit from exports.
Need for game changing reforms
While large cities continue to be in the grip on the coronavirus, rural recovery has been eyed by not just the corporate world but even RBI Governor Shaktikanta Das was seen hoping for a strong agriculture output. The investment firm said that for India it is now important to reduce dependence on monsoons and not about where farmers can sell. “What is required is not APMC reforms — there must be more serious efforts at execution of Irrigation projects. This would help reduce dependence on monsoons which is the primary source of volatility in farm incomes,” it said.
“In our view, the new scripts are interesting, can help create some jobs, but are not game changers — we expect a rebound in macro in 2HFY21/ FY22 but currently see less room for a multiyear bull macro cycle,” Bernstein said. The story now revolves, not around the shape of recovery for India, but whether GDP growth can inch up from current levels back to 7-8% levels and sustain there for several years.