Why foreigners could stay away from Indian equities

Sanjeev Prasad is a very mild mannered market veteran known for his contrarian calls. He heads institutional equities for Kotak Securities, a large stockbroking firm. He is outraged at the lack of decision-making in India and believes that foreign investors would not return to India for a long time if the government does not act over the next three months.

“There is a lot of talk but one needs to see action on government revenue generation and cutting subsidies,” he told NDTV Profit in an interview.

On tax reforms: India’s tax-GDP ratio is the lowest among emerging and developed markets. It fell to 10 per cent now from 12 per cent four years ago. The government needs to lift it to 15 to 20 per cent over a period of time. Otherwise, we would have high fiscal deficit and upward pressure on interest rates. The General Anti-Avoidance Rules or GAAR are not the only reform. There has been a debate over goods and services tax or GST for five years. Yet, there are no signs of implementation. The government needs to cut subsidies. The last time diesel prices were revised was in June 2011. Each time there is a political excuse to now raise diesel prices. India will have elections every now and then. The government cannot hold these reforms to ransom.

FIIs frustrated:  The government needs to show that they mean business to the world. Instead of that, we are in a state of denial. We need to acknowledge problems and put our house in order. Relatively, we may be doing better than Europe in terms of growth but our per capita gross domestic product is nowhere near these nations. However, Indian equity markets are not cheap. Large cap shares are expensive and India has to get things going to justify high valuation in comparison to other developing countries.

What is needed to be done: The government needs to get the fiscal situation in order. Revenue has to go up and subsidies have to go down. India’s subsidies are getting close to 2.5 per cent to GDP. That money could be easily deployed into building the country’s infrastructure. The fact is that with a high fiscal deficit, there is no scope for providing any stimulus to the economy.  Power sector reforms are only talks and power generation projects have come up without any guarantee of coal or gas supply. Power tariffs have to go up to ensure the survival  of state electricity boards. Even at $ 100 per barrel average price for 2012-13, India’s current account deficit would be $ 55bn. About $ 50bn of either foreign capital is needed to bridge that gap. Unless we assure the world that we mean business, have a stable taxation policy and sustainable economic reforms, foreign investment would be hard to come by.

What should investors do: It is tough to recommend any stocks. Good companies are few but expensive. HDFC Bank has delivered strong profit growth but it trades at 4 times the book value. Such a high premium cannot be justified as a high profit growth rate is not sustainable. Similarly, ITC is trading at 27 times earnings per share for 2012-13. Given that the volume growth is likely to slow, it is an expensive proposition to buy ITC at current prices. Investors are better off staying away from the market till the government resolves important fiscal issues.