India Economy

Bad times aren’t forever

Manish Kanchan Rathin Vyas | Updated on December 21, 2013 Published on December 21, 2013

India’s woes may be coming to an end

As more good news trickles in, investments in India will regain vigour.

The last few quarters have been challenging for India — with GDP growth declining sequentially, worsening foreign trade triggering a sharp depreciation in the currency, and inflation, interest rates and budget deficits well above comfort levels. However, there is ample reason to believe that India’s woes are coming to an end. This conviction stems from the exemplary resilience shown by the economy in the face of past adversities, a closer analysis of its economic cycles, and visible signs of a reversal in recent trends.

Basic resilience

There is some amount of anticipation, even anxiety, in the investor community over the outcome of the upcoming general election in India and the impact of global events, such as the tapering of quantitative easing by the Fed.

However, while the effects of adverse events — political or otherwise — impact on India’s prospects in the short term, both the Indian economy and its capital markets tend to tide over these in the medium term.

On the political front, India experienced its most volatile political period in recent history from 1996 to 2000 when it saw five governments at the Centre under three different prime ministers and a war with Pakistan. Yet, GDP growth over the period (March 1996 to March 2000) averaged 6.7 per cent and the Sensex gained by nearly 50 per cent.

Two key events in late 2008 precipitated the slowdown in India: the Lehman collapse followed by the terrorist attack on Mumbai within three months. India’s GDP growth fell to 5-6 per cent in the next few quarters and the Sensex crashed to below 10,000. But the nation emerged stronger from the crisis, marked by a return to the high-growth trajectory of 8 per cent plus and a doubling of the Sensex by late 2009.

Economic Resurgence

The last three economic cycles before the current one lasted for 5-6 years (between lows): 1993 to 1998, 1998 to 2003 and 2003 to 2009.

The lows are characterised by a bottoming-out of almost all macroeconomic indicators — economic growth hits a trough and foreign trade, government finances and interest rates are stretched.

The resurgence of the economy post the cyclical lows is usually fast and steep, with an even quicker appreciation in the capital markets and valuations. In mid-2003, GDP growth had fallen to a multi-year low of around 4 per cent, while fiscal deficit and inflation had ballooned to 6 per cent each. The stock markets had pared gains from the IT boom and foreign investment had slowed, reflected in a weakening currency.

Subsequent quarters started showing signs of rapid recovery and growth picked up to over 8 per cent in less than a year, foreign investments surged and the rupee recovered almost 10 per cent — all these while inflation held steady. The stock markets almost doubled by the end of 2003, and the Sensex galloped to treble by early 2006.

The story was no different in 2009 when the past year had seen the global financial crisis unfolding. Growth had moderated to levels of 5-6 per cent, interest rates and inflation were in high single digits and budget deficit was expanding. Consequently, capital markets had crashed to half their boomtime highs. Just like the previous cycle, the economy recovered rapidly. Beginning 2010, India clocked consistent GDP growth of 8-9 per cent for five to six quarters, buoyed by a moderation in inflation, interest rates and budget deficit.

Towards the end of 2010, stock markets had doubled from the 2009 lows, adding a trillion dollars in market capitalisation. The rupee had also strengthened by 10 per cent.

It has been four years since the last cyclical low hit India in 2009, and as on previous occasions, most economic parameters are at multi-year lows. The worst seems to be behind us, and the cycle is poised for a turnaround.

Welcome signs

Some signs of an uptick are already evident. In the July-September 2013 quarter, exports grew over 10 per cent compared with the corresponding period last year even as imports registered a decline on the back of moderating gold and oil imports. Consequently, current account deficit for July-September plunged sharply to a little over $5, a fourth of the level seen in the same period last year.

The Government expects to contain CAD at 3 per cent of GDP in the fiscal ending March 2014, which is almost 40 per cent lower than in March 2013. Together with continuing robust capital inflows, this should lend crucial support to the rupee in the medium term.

Therefore, political and other events have failed to make a lasting dent in the Indian economy in the past, and capital markets surge much faster than the improvement in headline macroeconomic indicators.

As more good news trickles in over the quarters, investments in India, including private equity, will regain vigour. Greater predictability, particularly towards the second half of 2014, will induce fence-sitters to pay premium valuations to close deals. The right time to invest is now when valuations have still not run up much, and not later in 2014 when indications of an economic turnaround emerge.

A spurt in the markets and valuations over the course of next year will also set in motion a flurry of PE exits, including PE-backed IPOs. Again, PEs would do well to start preparing portfolio companies for an exit now, so as to make the most of the opportunity when the tide turns.

( The authors are co-founders, Sage Capital.)

Published on December 21, 2013
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