Wednesday, May 2, 2012

Long Grind Ahead

The sentiment post the budget has turned out to be a lot more negative than was anticipated at the time of the previous post. ‘Policy paralysis’ has become talk of the town. GAAR has everyone fuming (notwithstanding the fact that it was always part of the plan, as part of the long awaited DTC, which, ironically, is part of the reform agenda). These are not surprising things. When the economy is roaring and everyone sees money being made everywhere, even dumb policy things seem quite palatable (remember the fringe benefit tax?). And when things are not looking as nice, even reasonable questions look like nit-picking.
Take GAAR for example. Which government in the world is not going after ‘tax havens’? Be it the US or the UK, tax laws are tightening to prevent leakages. And what is so wrong if the ‘Mauritius route’ to money gets closed? For FIIs, the impact is going to be zero if they hold shares for one year and sell through a stock exchange. Even if they sell before a year, the 15% they pay is nowhere near exorbitant.

The critical point is, the country is becoming unattractive to the investors as a whole due to a slew of issues. Policy paralysis is being talked about today, but policy was always paralyzed under the UPA regime. I don’t think anyone can name even one big reform under the stewardship of Dr. Manmohan Singh as Prime Minister. So long as things were humming along nicely, everyone was happy with the paralyzed the government.

This is not to say the government is not to blame. Over past two years, the clock has indeed been turned back on the economy, and by a long measure too. We now have the redistributive agenda on top with MNREGA as the policy poster child of the government, fertilizer/fuel subsidies as the favorite way to spend money and corruption/cronyism as a preferred way to run the administration. This is quite a setback for a country that had learnt to take pride in itself only recently, over barely a dozen years.

The fact that it has coincided with global sentiment not being so sanguine only makes it worse. It means getting back from this spot is going to be difficult, with no global safety nets, no windfalls from a roaring capital flows gravy train, no respite from commodity prices that buoyed the 1st term of the current regime. The negative economic trends that have been unleashed in India will take some time to play out and even more time to reverse. Take inflation for example, the current bout which is hardly over is typical ‘demand led’ phase, which was fueled by copious liquidity. Soon, we will move to a ‘cost push’ as high input prices start getting passed on to buyers everywhere and then some more as expectations of future inflation would reset to a new level. Then follows the ‘wage-push inflation’, as high cost of living forces the workforce across the board to demand some compensation. Those who believe inflation is going to be tamed soon need not wait for too long to see what is in store. We just need to wait for MSPs for agri-products for this year to see when ‘cost push’ starts kicking in.

Coming back to the sentiment, issues like GAAR are the added "bad taste in the mouth" when you suddenly realize that you pumped in too much money in a mediocre growth scenario and it may take a while for you to get out. Just the act of trying to take it out is likely to lead to major losses for investors. 

When the government is bent upon taking the country back to ‘same old’ and there is no hope of your fundamental growth assumptions to be realized, anything and everything looks irritating. That, in short, characterizes the mood you are seeing in the market.

So why are people not talking about this souring of ‘India growth story’? Partly, they have begun to. Those who don’t have too much at stake will probably start getting more vocal about it. Those who have a lot to lose will probably not want to profess their views openly and create a rotten mood all around.

But make no mistake, there is a long road ahead if you are looking towards 9% growth...
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