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US Could Lead Recovery

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[The Indian economy is entering 2012 on a much softer note. Fading economic growth, lack of reforms, fiscal constraints, volatility in currency and margin pressure on corporates are some key factors that are putting pressure on markets. Apart from domestic issues, the European debt problem and the United States' fragile recovery pose problems to the world. So far, developed nations have adopted many policies like quantitative easing, special credit lines, etc. to tackle issues but the problem is still very much there. In emerging  markets, there is a fear of a hard landing in China because of the real estate market bubble and many experts are of the opinion that it can jeopardise the growth in the fastest growing emerging economies. So all in all, we are entering the New Year on a cautionary note. In 2012, one can expect pro-growth policy making by the Reserve Bank of India (RBI), with about 100-150 bps of interest rate cuts over the calendar year. One may not expect much from the fiscal side as the government is already walking  a tight rope because of higher subsidies; social programmes such as the Mahatma Gandhi National Rural Employment Guarantee Act, the Food Security Bill, etc. The budget to be presented in February 2012 may not bring  much cheer as  duties and taxes are still lower than the pre-crisis levels and tax collections this year so far, have not been up to expectations. We expect the RBI to begin lowering interest rates by March 2012 and that would start yielding positive results by a lag of one to two quarters. Though current happenings are very much discounted by the markets, a lot would depend on how  the future shapes up. There is a likelihood of the market oscillating next year and of consolidation if things do not get worse from here. The challenging thing for policy makers here would be to restrict any sort of moderation in economic momentum and coming up with pro-growth policies. <table style="width: 250px;" border="0" cellspacing="9" cellpadding="9" align="right"> <tbody> <tr> <td style="text-align: center;"> KEEPING TRACK OF THE GLOBAL MARKET </td> </tr> <tr> <td>CONTINUING CAPITAL MARKET UNDERVALUATION COULD DRAW INVESTORS TO INDIA SOON LACK OF ADEQUATE EMPLOYMENT OPPORTUNITIES COULD LEAD TO YOUTH UNREST THE RBI COULD BEGIN TO CUT RATES BY MARCH 2012 CHINESE REAL ESTATE BUBBLE COULD BURST, CAUSING A HARD LANDING</td> </tr> </tbody> </table> Focus on growth acceleration is vital in the New Year. It is important because our country has a large young population, and it is essential to ensure proper employment opportunities to our youngsters. And to ensure employment opportunities, growth is imperative. If that is not achieved, it can lead to huge social unrest propelled by unemployment and under employment. India's young population which is widely referred as a "Demographic Dividend" can turn into a "Demographic Disaster", if not provided proper job opportunities. During 2011, the Sensex has given a -21 per cent  return, making investors nervous. A further 20 per cent  fall in the rupee has made the returns of foreign institutional investors (FIIs) stand at -41 per cent for the year. Such underperformance was punctuated by slowing order books, subdued revenue growth and pressure on the profitability margins. The weakening rupee and high interest rates have surely put pressure on Indian companies. Interestingly, if one sees the market cap to GDP ratio (GDP at market prices, at current prices and calculated by adding latest four quarter data), it is currently at around 62.25 compared to 56.22 in March 2009, when the markets made lows. Typically the ratio around 50 suggests value in the market and closer or above 100 indicates overvaluation. Further, the ratio of bank deposits to market cap ratio has also reached below 94 in December 2011. This ratio is below 100 for the first time since April 2009. This indicates that capital markets have corrected so much that the entire market capitalisation of the stock exchanges is lower than  aggregate bank deposits. This clearly indicates that capital markets are slowly becoming undervalued and one can expect some smart investors to come into the markets soon. This can arrest the capital market fall and can bring smiles to capital market participants in 2012. As the world's capital markets have become highly integrated, interrelated and interdependent, the Indian capital market participants shall keep the following factors in their radar: 1. "European Union" region breakup (or) "Euro" currency breakup 2. Elections in US scheduled in November 2012, as Obama is fighting against high unemployment, reducing popularity ratings and subdued economy 3. How strong will be the US economic recovery? 4. A possible Chinese real estate bubble burst. As things stand now, it appears that  Europe and emerging markets are in a clear mess. Ironically, the economic revival in the US is appearing to gain steam. If that happens, then the US may be the first one to recover, ahead of Europe and the emerging markets. So, what had started as a US economic crisis in 2008 may find the recovery from its point of origin. (This story was published in Businessworld Issue Dated 09-01-2012)