With the Goods and Services Tax (GST) Council on May 18 fixing tax rates on 1211 items, most of which will likely become cheaper as the new rates will be lower than the current effective levies and the Indian equity market continuing its bull run, it is a crucial time for the economy and markets. Bharat Iyer, MD & Head-India Equity Research, JPMorgan India and Sajjid Chinoy, Chief India Economist, JPMorgan tell about the macro outlook going forward.
Iyer clear believes the retail investor has done a lot better than the sophisticated institutional investors. “Local investor money coming into the market is a structural trend,” he said.
Below is the verbatim transcript of the interview:
Iyer: First and foremost I think we should appreciate that this is one of the several reforms we have seen in our history. What this means over an 18-24 month period for the macro is going to be very substantive be it the fiscal account, be it the inflation trajectory, be it the kind of liquidity we could have in the system potentially and the kind of government spending that could come in on the back of this. I think all these are very meaningful.
I think even near-term I think the government has gone out of its way to ensure that there is no major disruption and which is the reason most product categories, the GST is now closer to what it was and there has been no major disruption. We still see beneficiaries. I think the consumption space should do very well, particularly urban consumption. I think ease of business is going to go up phenomenally and I think the logistics space will be a key beneficiary. So, on balance I think a very big medium-term positive.
Q: The markets are celebrating it for ITC with 6 percentage point salute and generally FMCGs, the Colgate’s of the world have all been doing well. Are you upping your view on the FMCG space itself?
Iyer: Not completely. We have been running neutral stance on consumer staples, the sector we are discussing and I guess while we understand the medium-term implications in terms of how this could boost demand because there will be lower prices which could be passed on, valuations are a bit of a headwind at this point in time because let us face it, the market has been preparing for this event for nearly a year and so valuations have been pegged at a level where a substantive part of the good news at least on an immediate term basis is priced in.
Q: How does this change your macro GDP forecast. Clearly, the tax to GDP ratio is rising this year or next you think?
Chinoy: I think it might take a little time. I think the key for the GST is not to jump to what the revenue implications are, it is to appreciate the fact that India finally has a common market. I think the first round effect will be a big increase in productivity growth in the GDP numbers. For me that is the exciting part that this is tantamount to India signing a free trade agreement with itself. So, think about the first round being productivity growth. The second round will be tax buoyancy.
Now in the near term, there might be some disruptions, we should not panic, we should brace for that. Whenever you aggressively push the informal economy to the formal economy, you could have some disruption to supply chains, you could have uncertainty about inventory holdings for example but that is a one, two quarter phenomena. I think what is very impressive is this grand fiscal federal experiment has worked and more importantly, there is a concerted effort to make sure that there won’t be inflationary pressures on the back of this.
With what we have heard so far, 80 percent of goods so far are going to be 18 percent or below. So, I think in the near-term, let us hope that there is no price effect, you get big productivity increases and let us give the economy a couple of years for the dynamism to flow through and then the tax buoyancy to pickup. Let us not be in a rush to try and document how much the tax GDP has gone up.
Q: That is perhaps the FY19 story, but even in FY18 are you giving the GDP some more points than you previously had not just because GST is successful and here, but also because the WPI is lower than we thought historically and so must be even prospectively and IIP is not as bad as we thought. So, what was your GDP number and are you likely to, are you on the front foot to change it higher?
Chinoy: I think in May we will see retrospective higher revisions both on account of the IIP and the WPI but for me that is water under the bridge, those are statistical changes. The key for growth this year is more than statistical. It is the fact that exports have picked up sharply. So upward revisions to GDP growth in my view over the next 12 months will come from two sources. One is if you get this global growth recovery sustaining for a few quarters, India’s new exports, engineering goods, pharmaceuticals are very cyclical.
You have seen in the last three to four months, when there is any pickup in global growth, they respond very sharply. If that process continues for a couple of quarters, that is the trigger for an upwards revision along with the fact that at the margin, the worries about the monsoon have become a little bit less. So those two for me are the more fundamental drivers of any growth uptick this year.
Q: 7.4 per cent, what are your working with?
Chinoy: We are still more muted. We actually think we might get a number around 7-7.2 percent. I think last year will end closer to 7 percent for FY17, for FY18 I think we will still be in that range. There are some drags as well related to investment. Remember last year you had a great monsoon on the back of two droughts which meant agriculture grew at 5 percent. This year you will get a good monsoon on the back of a good monsoon which means agriculture is at 2 percent. So, there will be some offsetting drags.
Q: Your big India call, I mean what seems to be standing out now and this is almost an old story is that we don’t care for foreign institutional investors (FII) money. The tidal wave of domestic investments and physical investment is getting into financial is almost inexorable now, never ending. How does that change the India call, what would be – how does it change your Sensex perception for 12 months down the line or Nifty perception?
Iyer: I think we have to give credit to the local investor. I think the local investor has been extremely sharp. When inflation was a big concern, we saw all the money going into real assets. The minute inflation stopped being such a concern, the money came back into financial assets. Again within financial assets we have seen a very good shift from debt towards equity as there were indications that the monetary easing cycle was done with. So, first I think full marks to the retail investor; I think he has done a lot better than most of the sophisticated institutional investors.
In terms of the point you raised, the local investor money coming in, I think this is a structural trend. What this really implies is that sell-offs are going to be more shallow. They will not be as deep as they used to be when we were completely dependent on foreign money. However, that said, can we write off the foreign money completely, does it mean that we don’t need the foreign money? No way.
