The reversal of the USD fortunes is a lesson for many India bashers. In continuation to this article where many USD bears have been forced to rethink on their analysis, sell India analysts will be forced to rethink on their analysis going forward. India is a buy rather than a sell at this point of time when everything seems to be going wrong for the country.
India’s problems are fully out in the open. The country is running a fiscal and current account deficit, economic growth is at decade lows, threat of inflation is high on record lows of the Rupee (INR) and potential of hung parliament in the 2014 general elections is high. Corruption, weak infrastructure and high property prices are making the country uncompetitive globally.
India bears assume that the country will fall under the weight of its current problems and recovery will take a long time to come. INR at record of lows of Rs 61.30 to the USD, Sensex and Nifty at levels of 19,300 and 5800 respectively and ten year government bond at levels of 7.50% are all compelling sells given the insurmountable issues that the country is facing.
Gold prices are falling and Real Estate prices are too expensive and an Indian investor has no where to hide. Inflation is expected to trend higher making capital protected investments such as fixed deposits, provident funds and post office savings account unattractive.
India has problems but the question you have to ask yourself is whether the problems can be solved, at least partially. The fact that there is recognition of the problems of the country by the policy makers is in itself highly promising. For example government is curbing expenditure to bring down fiscal deficit (projected at 4.8% of GDP for 2013-14 against 5.9% levels seen in 2011-12) in an election year. Unpopular measures of hiking fuel prices have been taken. Subsidies are being rationalized.
Yes, the food security bill that was passed in parliament is negative for the subsidy bill but it remains to be seen how exactly it will work and what would be the real cost to the exchequer.
Similarly the focus on bringing down the Current Account Deficit (CAD) is high. Domestic gas production is being encouraged through price hikes, gold imports are being discouraged and inflation is being brought down. WPI (Wholesale Price Inflation) has come off from over 9% levels to below 5% levels over the last couple of years.
The INR at record lows coupled with a strong US economy will help exports of goods and services. Software exports of USD 56 billion is likely to get a boost as US accounts for over 62% of exports.
India being a democracy will always have elections every five years and despite coalition governments over the last fourteen years the economy has seen growth. Positioning portfolios based on election results will at best lead to heartburn.
Fighting corruption and building infrastructure is an on going process and with media and the general public becoming active there is a broad trend towards improvement in these issues. Selling India based on these factors is not a wise action. Real estate sector may not perform in the coming years until income levels catch up with prices but that should not deter investments in financial assets.
The fact that the USD is strengthening more on the basis of an economic revival rather than anything else is positive for India. India can see rising export income as well as more flows from NRI’s. Hence despite the negative sentiments of the Fed withdrawing stimulus, the outlook for the future is more positive than negative.
It is easy to point out what all can go wrong but it is not easy to predict what can go right. Hence when known negatives come into the forefront it is not actually as bad as it sounds.
India has a lot of known negatives but how many unknown positives are there is what you should ask yourself.