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Business News/ Market / Stock-market-news/  PM Narendra Modi should use honeymoon period to push reforms: Ryan Huang
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PM Narendra Modi should use honeymoon period to push reforms: Ryan Huang

The IG Markets strategist says reforms introduced by the government should perk up investor interest that had recently begun to flag

Ryan Huang of IG Markets says recent signals suggest that the best days in the markets may be over for now.Premium
Ryan Huang of IG Markets says recent signals suggest that the best days in the markets may be over for now.

Singapore: The reforms introduced by the Indian government should perk up investor interest that had recently begun to flag, said Ryan Huang, market strategist at IG Markets, a UK-based brokerage firm, in an interview.

With oil prices at four-year lows, the Narendra Modi-led government can cut down on fuel subsidies, signalling its intent to take the reforms further, said Huang.

Edited excerpts:

The new Indian government, with its ‘Make in India’ campaign, has been betting big on manufacturing-led growth. Do you think the focus of India, on an equal footing, should be to transition into a knowledge economy to sustain growth as an export-led manufacturing model is becoming less competitive globally?

While the push for ‘Made in India’ will bring obvious economic benefits, the country should not neglect to invest in its future as a knowledge-based economy. While there are pockets of this in India right now, there is still some way to go for it to take off on a wider scale. Typically, a knowledge-based economy and shift to innovation-based growth help to move up the value-add chain. This also helps economies avoid a middle-income trap and mitigates widening income inequality. However, the journey towards this is likely to be less straightforward than the push for domestic manufacturing, and the country has much work cut out on this front. India is currently in 109th place among 145 countries in its rank as a knowledge-based economy, according to a recent report by the Asian Development Bank.

India will need more reforms such as supportive laws, improved infrastructure, removal of barriers to trade and investment, up-skilling of labour force, higher spending in R&D (research and development) and innovative financing for small businesses and enterprises.

As a market strategist, do you agree with some analysts who share the view that with big increases in India stocks in the last 12 months, enthusiasm for Prime Minister Narendra Modi’s May win may have outpaced the reality on corporate balance sheets?

The stock markets rallied ahead of Modi’s election win on the prospects of many economic reforms, such as in making the energy industry, particularly the coal sector, more efficient.

To some extent, investors have dialled back their optimism, which saw stocks consolidating in September. There is starting to be some recognition that it is still early days and any economic benefits of such reforms for the corporate sector will still take time to trickle through.

We saw some early suggestions that Modi might struggle to push through some of these hoped-for reforms. In June, Modi had to roll back some train fare hikes amid some political and public pushback.

However, we’re starting to see investor sentiment improving with the government pushing through on the issue of fuel subsidies over the weekend.

Again, related to the Indian markets, is the bull run over?

Recent signals are suggesting that the best days in the markets may be over for now. Other macroeconomic factors are also weighing down on market sentiment. High on the list will be the uncertainty from possible ripple effects from the impending end of the US Fed’s QE3 (quantitative easing) programme in October. India has been dubbed one of the members of the Fragile Five (Brazil, Indonesia, South Africa and Turkey being the others). While the country’s balance sheet has improved since the last crisis, it is hard to rule out that investors may take a cautious approach and cash out. There is an overarching atmosphere of uncertainty with the mounting concerns over Ebola, warnings of a European slowdown and growth outlook cuts by the IMF (International Monetary Fund) and World Bank.

Stock-exchange data compiled by Credit Suisse Group shows that among Asian countries, only Thailand and India received net inflows of funds in September. Will these two countries continue to buck the trend? For the rest of the region, are we now seeing the first signs of foreign investor inclination to leave the emerging markets as currencies swing more violently.

September was seen by many as a turning point for the region’s forex and stock markets, where the overall net capital inflow ended. While Thailand and India may have performed relatively better on this front, there are signs that the inflows into those markets are also on the decline and these economies may not escape sharing the same fate as their regional counterparts. It is not hard to see why investors are getting a bit nervous with all the factors falling in place for further bearishness in the market. The greenback is pushing four-year highs and is set to strengthen in the long term as the likely schedule for rate hikes draws closer. With worries as well that the carry trade may be unwinding, foreign investors may start looking for yields elsewhere.

What are your biggest concerns when it comes to India—is it sticky inflation, equity valuations, red tape, slow progress on reforms?

While it’s still something to watch closely, inflation has fallen down the list of things to worry about with rates dropping to near five-year lows, especially on the back of falling commodity prices. It is still worth noting though that the inflation rate is still above the central bank’s comfort level.

Poor governance and inadequate infrastructure have long been blamed for India not fulfilling its maximum potential. So what will be more pressing for now is the progress of reforms, which will help catalyse many sectors and improve the effectiveness of public expenditure.

The latest industrial production numbers add some urgency to this, where August figures showed output rose just 0.4% year-on-year, flat from the previous month and way below the market consensus of 2.6%.

As a markets strategist, where do you see the rupee headed—short- and medium-term?

The rupee is likely to be under pressure against the greenback in the short and medium term, as the likelihood of the Federal Reserve raising rates draws closer. Much of the upside from India’s positive economic and political developments has already been priced in. For the rupee to gain more traction, we will need to see much stronger economic growth and slower inflation. While cost pressures have let up recently, factory data is still relatively weak.

What are the economic trends that you are picking up from the IMF forecast for this regions—India, South-East Asia and China?

There is a sense that the outlook for global trade is increasingly being tempered, which underscores the importance for countries to take on structural reforms to drive domestic demand. In this environment, there is likely to be a wait-and-see attitude among businesses when it comes to investments and spending. This suggests that at least in the near term, we should brace for growth to be uneven and still vulnerable to downside risks. For example, according to the IMF, India’s economy is expected to grow 5.6% this year and 6.4% in 2015. On the flipside, China’s growth is forecast to slow from 7.4% this year to 7.1% next year.

What is your take on the new labour reforms unveiled by the Modi government? In the last few days, the Indian government has launched a new inspection scheme, friendlier provident fund facilities, among other reforms. Do you see increased foreign investments flowing in due to these measures? What more measures do international investors want?

The new labour reforms are an encouraging step in the right direction and some may argue quite long overdue since India ranks in the bottom third of the World Bank’s ranking of nations in terms of ease of doing business. While there is a lot more that can be done, these are the low hanging fruit that the government has tackled first and what international investors are looking for.

The streamlining of labour laws to make inspections more transparent will go some way in cutting red tape and corruption concerns. This makes it a more conducive investment environment and will help the ‘Make in India’ campaign gain traction.

Red tape and bureaucracy have been huge bugbears for foreign companies and any measures to address them will be hugely welcome. Tax reforms are one area that will benefit from more transparency. High-profile tax disputes, such as those involving global companies Vodafone and Nokia, have reflected some of the frustrations and complications of operating a business in India.

Should Modi take advantage of the falling oil prices and go in for more reforms? Last week, India undertook further liberalization of diesel prices, and this should offer fiscal savings over time—what do you think these savings should be used for? Analysts share the view that the fall in crude prices provides support for India’s trade balance and this will help bring down current account deficit. Do you think this will eventually help insulate India against the swings in external financial conditions?

Modi still enjoys the popularity from his strong election mandate and should take advantage of the honeymoon period to push through further reforms. With the global outlook more uncertain in the next few quarters, any unpopular policies may be less palatable if pushed out during a slower economy.

A stronger current account deficit will go some way to buffering India against external shocks. It will also further dispel the Fragile Five label that may prove not as relevant any more. Fiscal savings could possibly go towards bridging the gap in the education system, such as higher investment at the basic level. This will help build the fundamentals of a more skilled workforce, a productive economy and gradually reduce income inequality.

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Published: 23 Oct 2014, 07:21 PM IST
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