April 08, 2020
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Hold That Bubbly

The trends are good, but it’s not time to celebrate yet

Hold That Bubbly

THE silver lining started appearing six months ago. Rising cement and diesel consumption were the early signs. Then came reports of increased sales in the auto industry. Now, with credit growth up and the industrial production numbers hitting 14-month highs, even sceptics acknowledge that a recovery is on. So the question is: when do we pop the champagne?

Two years of recession had sent a clear message to industry: shed the fat, focus on core competencies, sweep away inefficiencies, become cost-conscious. Shape up or ship out! Many heeded the message and trimmed their operations. Banks focused on bad debts, ensuring that the undeserving got no money and the efficient got it at historically low rates. Two years on, we see a new breed of lean fighting corporate machines.

The real push, however, is likely to come from the farm sector. Agricultural production has exceeded expectations again. The rabi crop has grown 50 per cent in the last decade. A rise in farm incomes has significant impact on consumer spending. In fact, it is higher agricultural incomes which has accounted for the higher cement offtake, as well as the credit demand.

The concept of swadeshi needs to be redefined to mean "Made in India", and not "Made by Indians".

There are, however, areas of concern. Indian infrastructure is among the worst you would find anywhere on earth. Export performance is poor. Infrastructure has suffered due to faulty policies, the details of which have been analysed by one and all. But one aspect that perhaps has not received the attention it deserves is real estate, which must be declared part of infrastructure and thrown fully open to foreign investment. There is no justification for property prices to rival those of New York or Tokyo, when incomes are barely 5 per cent of those cities. Supply has been artificially suppressed, and the absence of quality developers and an archaic Rent Control Act have ensured that Mumbai has the most depressing skyline of any financial capital in the world.

Export non-performance has to do with the fact that 52 years after Independence, we are still unable to produce quality products at cheap prices. This is due to the license raj that set us back at least 20 years in terms of industrial development. I strongly believe the traditional concept of swadeshi must be redefined, from "Made by Indians" to "Made in India". Today, it is considered patriotic to protect a few thousand industrialists. But what about the millions of consumers who, despite being among the poorest in the world, pay more for sub-standard goods and services than their rich US and Japan counterparts? Under "Made in India", it doesn’t matter who the producer is, as long as jobs are created for Indians, cheaper quality goods are available and export dollars are generated. The UK’s highest export contributor is the auto industry and only because Toyota’s European manufacturing facility is in the UK. If the UK tried Indian-style swadeshi, Toyota would have gone elsewhere and the UK would have been the biggest loser.

Coming now to the equity markets, what is happening now is a quiet revolution. The end result will be a more transparent market. Volumes are already the third highest in the region, and the return on equity is 17 per cent, yet the price earnings multiple is 50 per cent below the average price earnings multiple in the region. If one were to assume that India would trade at its five-year average to the rest of the region, an index of 5400 by March is on the cards.

The one factor that can blow all these theories sky-high is of course politics! I am assuming we will get a reasonably stable coalition government after elections that is committed to continued economic reform. So, I guess it’s time to buy the bubbly and store in the freezer. The party should be on by mid-November, so don’t be in a hurry to pop the cork just yet.

(The author is Managing Director, Credit Suisse First Boston (India) Securities Pvt Ltd)

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