India shares face near-term turbulence

There is no doubt that the debacle for Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) in provincial elections in Bihar has cast a dark shadow over the country’s equity market in the near term, with the government’s ability to push economic reforms through a fractured legislature topping investor concerns.

Adding to the jitters is renewed talk of US rate rise in December which, if it happens, would trigger outflows from riskier emerging markets such as India to America. Falling global commodity prices would also take a toll on market sentiment, particularly for metal makers like Vedanta and Hindalco.

Large foreign portfolio investors, a crucial swing factor for the domestic market, are either paring their exposure or sitting on the sidelines. Upward pressure on retail inflation, particularly on food items such as daily-use pulses and onions, and continuing sluggish corporate earnings are also worries for investors.

The next big event that will be closely watched is the winter session of parliament, which is scheduled to begin on November 26. Bolstered by the spectacular victory for regional satraps of Nitish Kumar and Lalu Prasad Yadav — with Sonia Gandhi-led Congress party riding piggyback, Modi is set to face stiffer opposition to his pet schemes like opening up the economy.

“The ripple effect of the poll rout will be felt in parliament,” said equity strategist V. Venugopal. “The government could face some embarrassment and the casualty will be the economy.”

Politics and reforms

Obviously, New Delhi will have to focus on the economy to regain the political initiative. “We have to be single-mindedly focused on development, development, development,” said Chandan Mitra, a BJP member of parliament. “We can’t afford to be distracted by anything else.”

And, in the aftermath of the poll defeat, the government eased foreign direct investment (FDI) in 15 major sectors, including mining, defence, civil aviation and broadcasting to bump up investment and accelerate growth.

“The crux of these reforms is to further ease, rationalise and simplify the process of foreign investments into the country and to put more and more FDI proposals on the automatic route, instead of the government route, where the time and energy of the investors are wasted,” the government said in a statement on Tuesday.

To help speed up decision-making the Foreign Investment Promotion Board can give single-window clearance for investment projects of up to Rs. 50 billion, up from Rs. 30 billion. In defence projects, foreign ownership can be increased to 49 per cent without seeking government approval.

The Congress, along with other opposition parties, which together hold a majority in the Rajya Sabha — the upper house of parliament — is reported to be planning to stall some of these moves in parliament.

“We cannot have scrutiny and cabinet committee approval done away with,” senior Congress party leader Anand Sharma told the Indian Express, adding that Congress was in favour of FDI in defence but with “checks” in place.

In other words, there will be more hairsplitting in parliament which in effect will slow down or stall the implementation of New Delhi’s efforts to cut red-tape and speed up investment.

With such uncertainties lingering, including a US rates lift-off, the top-30 Sensex fell 2.5 per cent in the holiday-shortened week to 25,610.53, extending a run of weekly losses to three. The broader 50-share Nifty index shed 2.4 per cent to 7,762.25.

Among the big losers was Dr. Reddy’s Labs that shed 6.75 per cent to Rs. 3,384.45, after tumbling 14.7 per cent the week before on a warning issued by the US Food and Drug Administration about some of its facilities that export to the US market. The fall in commodity prices sent state-run energy explorer Oil and Natural Gas Corp reeling 9.2 per cent to Rs. 228.80, while metal makers Vedanta fell 5.4 per cent to Rs. 87.25 and Hindalco dropped 4.1 per cent to Rs. 77.60.

Buy on dips

Nonetheless, the long-term outlook for stocks is undoubtedly bullish. Market pundits believe savvy investors should use the near-term market turbulence to pick and choose shares, build a portfolio and await bigger returns over a longer horizon.

“There is a gigantic opportunity if you take a time frame of 5-10 years. People should not feel left out,” Madhusudan Kela, chief investment strategist at Reliance Capital AMC, was quoted as saying by the Economic Times.

“We are roughly $2 trillion of GDP now, and if I assume that you can have 13 per cent kind of notional GDP growth rate over the next 10 years, then you could be somewhere between say $6 trillion and $8 trillion depending on what kind of growth you are assuming.”

Some of the wealth creation will be in private hands and some in the public market domain, he said.

Sectors that investors should look closely for investment include construction, railways, defence-related and real estate development, all of which have been in the doldrums but could benefit enormously as government steps up spending and FDIs accelerate.

For instance, one of the prime thrust areas during Modi’s state visit to the United Kingdom was in defence, railways and property. For the first time, the financial arm of state-owned Indian Railways will launch rupee bonds in London. Mortgage lender Housing Development Finance Corp proposes to raise rupee bonds up to $750 million.

Meanwhile FDI jumped 40 per cent over the past one year, Modi said in a speech at Wembley on Friday, underscoring the confidence of global companies in India’s growth potential. The inflows should perk up as the government eases caps on foreign investment and ease of doing business improves.

The writer is a journalist based in India.