Sandip Sabharwal - Uncategorized - THE ECONOMY WILL DO JUST FINE

I read too many brokerage reports who are commenting on 2019 elections and want investors to make strategies based on a possible outcome which they are trying to forecast. Factually that is essentially unforecastable and as such taking an Investment Decision based on that is foolish at best. In my view irrespective of who wins (Hopefully Modi) we will do just fine, atleast for a few years.

The economy is a huge juggernaut which is difficult to move and once it starts moving in one direction is tough to stop and reverse the direction. We have already seen an example of that over the last 4 years where despite the best efforts of the Modi Government it has been tough to turnaround the economy suffering from multiple issues like poor consumer confidence, high inflation, low investment demand and a broken banking system. Demonetization did nothing to help their cause and delayed the impact of positive measures taken by more than a year.

However as I sit to write today it is very clear that the Economic Juggernaut has turned around and started to accelerate. Low inflation of the last few years combined with improving income to expenditure ratios have led to a revival in consumer demand both at the Urban and Rural levels. A good monsoon this year should further add to this despite the increase in Crude Oil prices which has a negative pull on the other side. Salary hikes have come back & the impact of Pay Commission hikes is also better seen now. This is reflected not only in the consumption of Non Durables but also in higher value durables like Cars, bikes, TV’s etc. Increasing occupancy of hotels in the holiday seasons and packed holiday destinations is another factor verifying this sentiment. This should continue going forward.

The government, when it took over worked on lot of aspects to improve transparency and this has speeded up project awards in the infrastructure sector. A huge number of Road, Railways and Urban Infrastructure projects have been launched whose implementation has picked up pace now and infrastructure investments generate lot of demand of products as well as employment and that is seen today. The implementation of many projects will be very rapid over the next two years and is reflected in the guidance of many companies of this segment who are looking to grow 20-40%.

Corporate Investment demand has been still slack as there was enough spare capacity created in the last boom which is now getting filled. Many Capital Good companies are now indicating improved order books and visibility of growth. This combined with the turnaround in many commodity industries will be overall positive for corporate sector investment demand. The ability of banks to fund new growth projects was also significantly hampered due to the state of their balance sheets. Thankfully now the writeoffs are complete to a great extent and the next 8-10 years should see a strong balance sheets from financials as the fear of the past will be within them and hopefully we will see a permanent change in the way many banks operate. Despite somewhat higher interest rates as inflation picks up the ability of these banks to deliver credit will be stronger.

Clean auction and project award processes combined with the implementation of GST will improve the productivity of the overall economy. We have already seen efficiency gains play out into the numbers of many consumer companies. As the systems stabilize we will see these gains flow into the entire economy. These efficiency gains at a time of an improving economy can add to the profitability of companies.

Many other aspects related to financial inclusion, the low cost housing schemes, LPG for all, Electricity for all, a low cost digital economy  etc will also have a positive impact on improving the efficiency of the overall economy.

So in this context when we evaluate the economy beyond 2019 the way we need to look at it is that the good work done cannot be undone very fast. Undoing the bad of the past has taken 3-4 years and the economy has started improving now. Some reforms are structural in nature i.e. GST, Auctions, Project award transparency etc. There will be others which are not structural but will still require 3-4 years to undo. As such if the Modi Government comes back then we will see continuity and possibly a high growth economy for the next decade or so. Even if there is a change Economic growth will continue to be strong and corporate sector profitability revival will continue for atleast 3-4 years. Subsequently depending on the kind of dispensation at the Center we could see an end to the cyclical revival.

Many are concerned on high Crude Oil prices. It is a fact that very high prices will hurt India. However very low prices were good just for Government Finances. Our traditional export markets and global investment demand suffered a lot due to the commodity crash and had an overall negative impact on India as Indian commodity producers also went into losses. Right now we are in a decent scenario with a balance for both sides and investment demand in many commodity industries is coming back.

In conclusion I believe that we have now entered a high growth phase of the economy which will continue for a few years. Whether we will have 10-15 years of a high growth economy finally depends on us and how we vote next year.

The choice should be clear, Vote for ….

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