In an interview with ETMarkets, Singh said: “We expect rural demand to recover in 2023 on the back of 1) a favourable base, 2) a positive read-through on winter season sowing, 3) inflation peaking on essential spending, and 4) early signs of an uptick in rural wages” Edited excerpts:
How do you sum up 2022 and how do you see markets in 2023?
2022 was year full of uncertainty and geopolitical tensions. For India, the crude and other commodity prices going up pressured the deficit numbers.
2022 saw the steepest rise in global interest rates following the rise in inflation.
CAD (Current Account Deficit) and inflation have hopefully peaked, and the rate hike cycle will respond to these datapoints.
Broad-based economies, including the rural markets, have a supportive base, and the winter sowing season has been encouraging. The robust health of the financial system is a positive as it helps in potentially delivering credit-led growth for the economy.
While the macro is moderating, the bulk will be visible by the Q2 / Q3 quarter of CY23. India hopefully will be less impacted by a global recession.
In FY23 Growth in personal consumption and investments offset a YoY contraction in government spending and an unfavourable trade balance.
In terms of sectors, growth was primarily led by a recovery in services hit by COVID, like retail trade, hotels, and transport etc. and continued strong growth in business services (IT) and public administration.
However, the peaking of fuel prices, moderation in commodities and active management to manage food prices have played a role in the moderation in Inflation.
With the government taking over a part of the burden on fuel and food prices (higher fertilizer subsidy and reduction in excise duty), there has been a higher impact on social and subsidy spending, which led to a frittering away of the gains from higher tax collections.
Other mechanisms followed include active action through export bans of key food products such as wheat.
Do you think the sectors that worked well in 2022 will continue to perform in 2023 as well?
FY23 saw a recovery in cyclical buoyed by increasing demand for infra and discretionary spending, driven by pent-up demand. Autos saw some respite in chip shortages, but metal prices weighed on profitability.
Raw material inflation impacted consumer stocks as well and demand took a hit from overall inflation, especially in rural.
This year, we expect corporate credit growth to remain high driven by private and government CAPEX, and while consumer discretionary should soften, rural demand should revive with government spending and easing inflation.
IT had a lackluster year as global corporations brace for recession. However, we feel, digital transformation has a long runway and will drive a structural increase in IT outsourcing. PE multiples are still above pre-covid levels.
Where do you see rupee headed in the year 2023?
In 2022, INR continued to remain under pressure due to factors such as widening yield differentials in favour of the dollar, increasing trade and CAD (Current Account Deficit) as well as negative FPI flows.
Emerging market currencies were down 4% lower, but INR depreciated by 10%. However, in 2023, we expect the Fed to soften its hawkish stance.
Also, growth in economies like the US, UK, Europe, and China may experience a slowdown, but India’s growth is likely to remain robust.
A global slowdown will also keep commodity prices in check and normalise the imports, which should stabilise the trade and CAD deficit. Better growth prospects of India are also likely to improve FPI (Foreign Portfolio Investment) inflows.
Overall, owing to the above cited reasons, we expect INR to stabilise in 2023 in the range of Rs. 80-83 per dollar but for capital flows related impact.
Few headwinds which India has to battle in the first 6 months of 2023?
The world is facing several headwinds such as steep rise in interest rates and consequently rising cost of capital, inflation, geopolitical uncertainties, bi-polarisation of the world power, supply chain disruptions etc.
• In the year gone by these factors led to sharp rise in energy prices and logistics costs. Though what seems like the Current Account Deficit (CAD) has peaked as energy and other commodities have started to correct if there is a further spike in energy costs India has also largely exhausted its macro buffers (Forex reserves, fiscal room) as it deployed them to manage inflation and currency. This raises macro vulnerability if inflationary risks reappear.
• Inclusive Growth – The rural economy was impacted for the second consecutive year, while inflation has impacted overall consumption. Most of the recovery in the consumption is in the urban areas whereas rural areas still lack behind. Challenge will be to give some fiscal stimulus at the right time in the rural areas to revive the sleeping demand. With government finances in a tough spot this seems unlikely.
• Geopolitical worries – India and China have been involved in border dispute and that situation is still under control. Any escalation could lead to risk going up in the system
• Fiscal Management – Consumer inflation in India, as measured by CPI (Consumer Price Index), peaked in November, with a moderation of 5.8% from 6.8% in October and 7.4% YoY in Sep-22. Peaking of fuel prices, moderation in commodities and active management to manage food prices have played a role in the moderation in Inflation. With the Government taking over a part of the burden on fuel and food prices (Higher fertiliser subsidy and reduction in excise duty), there has been a higher impact on social and subsidy spending, which led to a frittering away of the gains from higher tax collections. Other mechanisms followed include active action through export bans of crucial food products such as wheat.
Which sectors could remain in spotlight in the Budget 2023 which is also the last Budget before India goes to poll in 2024?
1) Capex driven sector – Manufacturing
The priority of the government is creating jobs and hence more sops towards the manufacturing sector won’t be surprising.
There has been a lot of discussion about early signs of revival in private CAPEX. The finance ministry, which has begun its pre-budget consultation with various ministries and departments, has indicated that schemes that push local manufacturing and exports offering various support measures will get priority in fund allocation.
Food and fertiliser subsidies alone account for about one-eighth of India’s total budget spending of 39.45 trillion rupees this fiscal year, but reductions in food subsidies, in particular, may prove politically sensitive with elections looming on the horizon.
2) Upskilling
Apart from incentive-based schemes like PLI, the government should allocate more funds to upskilling and vocational training in the upcoming Budget 2023-24. This is required to further sharpen the skills that are needed for new-age sectors that will drive the next leg of manufacturing growth.
3) Expansion of PLI
The Product-Linked Incentive (PLI) scheme has the potential to take India’s exports to a new height while diversifying exports. The government may enhance the PLI exposure and expand them to potential upcoming industries for boosting exports.
The existing PLI schemes are limited to corporates and large companies in specified sectors. There is an expectation that the Budget 2023 may extend the PLI schemes to identified sectors and MSMEs in manufacturing to boost exports.
4) Rural Economy
The rural economy in India witnessed signs of moderation from mid-2021, and much of this weakness was triggered by high inflation, disproportionately affecting the bottom of the pyramid. Other reasons for rural weakness were:
1) gradual pullback of government subsidies given during the covid year and low crop production due to late arrival and uneven distribution of monsoons.
2) India’s Kharif production (summer season sowing) is expected to reach 150MMT for CY22 (as per estimates by the Agri ministry), which is a 4% decline over last year. This is still decent, keeping in mind Kharif acreage was tracking 15% lower YoY at one time.
3) Moreover, the MSP increase in this Kharif season has been in the 5-9% range, essentially covering inflation. Most FMCG companies commented that the demand scenario in rural was sluggish in Sept quarter and expected recovery in 2H.
4) The winter crop (Rabi crop) output has grown at a CAGR of 3% in the past 15 years, and current year acreage has shown a decent start till now with total area sown till 30th Dec up ~4.5% YoY (Growth was 7% at the beginning of Dec).
5) MSP increase has been higher this year, with an average increase of 6% (2-9% across categories). The biggest rabi season crop, i.e., wheat, has seen an MSP increase of 5.5% vs ~3% in the last three years. Rural wage growth has also started to show some signs of recovery but still tracks below the inflation rate of 7%.
6) We expect rural demand to recover in 2023 on the back of 1) a favourable base, 2) a positive read-through on winter season sowing, 3) inflation peaking on essential spending, and 4) early signs of an uptick in rural wages.
Do you see interest rates peak out in 2023. If yes, what is the kind of impact we could see on currency and equity markets?
Yes, we expect the interest rates to peak out in 2023. At least the increase in incremental interest rates will first slow down and then peak out unless crude jumps from here.
• India is going through a forced rate cycle, as the economy is not overheated, and most of the sources of inflation are global. India has been importing inflation.
• India is pursuing rate increases to keep the rate cycle in sync with global rate increases to help reduce the impact on currency and flows.
• While Fed has increased its policy rates aggressively by 425bps from 0.25% to 4.5% in the last 1year, in reaction to that, RBI has hiked the repo rate by 225 bps from 5% to 6.25%.
• With the increase in rates, India has moved from a negative real interest rate to a 0% real interest rate, while the US is still running a negative real interest rate (2 percentage points).
• RBI’s intervention through rate hike has kept India’s real interest rate differential with the US at 2%, closer to the pre-COVID average of 2-2.5%
• India is less likely to keep a high real rate differential with the US, which implies that there could be some pressure on the Rupee, especially as CAD is expected to remain high.
• Forex reserves have moderated by over $100bn, and interventions are also less likely.
• The Rupee may not depreciate much as macro vulnerabilities for India are not very high, and we expect capital flows to remain buoyant.
What were your key learnings from 2022 which will come in handy in 2023 as well?
We need to embrace that stock market volatility is part and parcel of life. There will always be external factors like the Russia-Ukraine war, rising interest rates, Covid-19 etc. which can have short to medium-term impacts on the markets.
I think patience and conviction is key as markets invariably reward long-term investors.
We at InCred Asset Management scout for companies that have huge opportunity sizes and superior execution. At the right price, these are the companies which would deliver highest returns to investors in the long term.
In terms of primary markets – after what happened in 2022 with New Age companies do you think future listings will also see similar enthusiasm from retail community?
All investors need to understand that stock price is nothing but the present value of future cash flows. New-age start-ups fail to hold on to listing gains as interest costs have gone up which increases the cost of capital and eventually the expected returns.
Some of them had specific issues like the top management exit, end of lock-in periods or lower-than-expected growth.
I advise retail investors to be cautious with these new-age start-ups while applying in the primary market or secondary markets.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
