Kotak Mutual Fund CEO Sandesh Kirkire
Last year proved to be fairly
good for Indian markets, despite the pessimism in the economy. Key benchmark indices Sensex and Nifty returned 25.55 per cent and 27.54 per cent, respectively, and the 10-year gilt yield was over 10 per cent. Yet, in the same year, India's economic growth declined to 5.3 per cent (January-September) from 7.9 per cent for the same period in 2011. We know why-high interest rates, policy stasis, high inflation and unbridled fiscal deficit, among other reasons
This overlap, a bad year for the economy but a good year for the market, is indicative of what lies ahead. The price of an assets class, such as equity or debt, is the monetary expression of the dominant sentiment about the future of the economy. So, an increase in asset prices suggest that a majority of market proponents are betting that
economic growth will improve this year.
There are reasons for this optimism. For one, the core of India's growth was its middle class demographic, which is a statistic that is only improving.
Also, while the
political logjam is disheartening, the dispute, for the most part, is not about the principle of free markets and liberalisation, but on the particulars of the reform and its distributive impact. So, an improved effort towards political consensus could see critical reforms pertaining to pension, taxation and corporate laws passed.
Furthermore, the global slowdown might improve India's position as an investment destination. The likelihood of a more benign monetary policy in 2013 is also a key reason for increasing asset prices.
The markets could continue with this trend, but more gradually. Debt and equity markets will take cue from the January policy statement and budget announcements in February. Despite this, the improvement in the economy could see asset classes continue to perform well.
However, the near insuperable
current account deficit of about 5.4 per cent of the GDP is a damper. This gap is not sustainable and will require a structured approach. Other than hydrocarbons, gold is a major item on the import bill. Therefore, It is only natural that policy action would be directed towards it. However, tariff measures have not been effective in addressing the issue in the past.
More importantly, India must aim to improve manufacturing competitiveness because only that would provide a satisfactory answer to India's job needs, export fillip and an inclusive
growth for the economy.
SANDESH KIRKIRE
CEO, Kotak Mutual Fund
(This is a sponsored article)
