May 8, 2003|
Calling long-term investors...
India is and has been one of the fastest growing economies in the world and is tagged as one of the 'emerging' economies. Inspite of this distinction, our stock markets seem to be under performing major world indices. To put things in perspective, BSE Sensex has lost 11% in 2003 (to date) as compared to gains in Nasdaq (14%) and SSEC (Shanghai stock market) (12%). We look at a few arguments that favour India and some that go against it.
Let us briefly look at what the negatives could be for our markets to under perform. To begin with, at the macro level, the government's financial performance may be termed dismal. Fiscal deficit for FY04 (budget estimates) at 5.6% is a cause for concern. There are two reasons for the ever-burgeoning fiscal deficit. One is the shortfall in revenue collections and second is the government's inability to keep a check on its administrative expenses. Also, with a lot of hindrances being faced by the government on the divestment front, some uncertainty always remains as to the government's ability to stick to its divestment plans. Moreover, since 70% of India's population thrives on agriculture, monsoons have a very important role to play in our economic growth, which dampened sentiments and hampered growth in FY03.
However, the fundamentals don't look bad either. International organizations are pegging India's GDP growth in the range of 5-5.5% in the current fiscal while domestic counterparts have predicted an even higher growth rate at over 6% backed by a strong growth in industry and services. This augurs well for our country as an investment destination, as GDP growth forecasts for other developed economies are not too enthusing.
Even on the monsoons front, the projection of a 96% normal monsoon is better than last year (81%). Normal or near-normal monsoons are very important for India's growth in the sense that since about 2/3rd of the Indian population is dependant on the rain gods for their livelihood, deficient rains has a curtailing impact on the spending power of these people. This not only affects sectors directly related to agriculture like auto (tractors and trucks), but also affects consumption, consequently leading to weakening demand in FMCG and consumer durables segments. Banking (retail/corporate finance) also gets adversely affected as consumers postpone their purchases.
The infrastructure drive initiated by the government has started showing results in the form of better results for steel and cement sectors and more is bound to follow, as trade would improve due to the enhanced infrastructure. Also, on the exports front, despite the strengthening rupee, exports have surged past US$ 50 bn in FY03. Considering India's export potential, India is well poised to attain its goal of 1% of global trade before the set target date of 2007.
From the stock markets perspective, a price-earnings ratio of around 11 leaves a lot of room for re-rating of the Indian bourses. This could be an important factor for the FII's to allocate their funds to India. It must be noted here that FII's have invested about Rs 4.5 bn in the last two months alone, which further cements the fact that Indian stock market valuations are attractive. Investors with a long-term view could possibly overlook the short-term concerns and start building their portfolio keeping in mind that India's growth triggers seem to be in place.
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