Media | Indian economy can grow

Gulf Times

26 August 2009

Jain says India’s growth remains intact.

The Indian economy could grow more than 6% this year despite below normal monsoon even as consolidated fiscal deficit is a cause of concern as it could hike cost of funds, according to a top fund manager.

Pinning hopes especially on financial services and infrastructure sectors as well as disinvestment (whose target has already been exceeded), Nitin Jain, Principal Fund Manager of Kotak Mutual Funds, said he expected Indian equity markets to “outperform” most alternative markets.

On the foreign exchange front, he expected it to be range-bound between Rs45 and Rs50 for a dollar over the next 12 months although it had peaked to Rs 50.52.

“India can grow at more than 6% without any issues. We believe that monsoon failure is not going to impact the economy in a big way” as growth in services-- whose contribution to GDP (gross domestic product) is increasing -- is still “robust,” he told a seminar ‘India: Beginning of a new era’, organised by Commercialbank.

Agriculture is expected to grow 1.6% (against 4.5% in 2008), industry by 2.6% (8.5%) and services by 9.4% (10.8%).

Rising trends in domestic savings and investments as a proportion to GDP could make the 6% overall macroeconomic growth “feasible”, he said, adding savings were a big positive in a weak external funding environment.

He pointed out that India’s share of investment to GDP was second only to China.

Although monsoon is more than 20% below normal and with certain areas being declared drought-hit, he said the rising produce price would largely offset the fall in the production, whereby the rural economy could remain strong.

The expanded national rural employment guarantee scheme could cushion farm income and that rise in minimum support prices could actually increase rural income in some pockets, especially irrigated areas, he said, adding rural consumption can buffer growth slowdown.

However, below average rainfall during the year may have an “adverse” impact on rural demand estimated for 2010 and if rains continue to play havoc, it could also put pressure on prices.

“Inflation is still in the negative zone but is likely to trend towards 5% beginning next year and there exists upside risk given the recent commodity price surge,” he said adding “we expect the expansionary policy not be reversed in a hurry.”

Although oil prices fall was a “significant” relief, the current rally is worrying as it is fuelled by excessive liquidity and reduced supply and not because of rise in demand.

Jain said there has been weak correlation of stock performance with agri growth trends.

“With reasonable valuations, high growth, a stable government with focus on inclusive growth, baring major shocks, we expect the Indian equity markets to outperform most alternative markets,” he said, adding the market was currently trading at 15 times the expected one-year forward earnings against a peak of 25 times last year.

Earnings in the first quarter have been much better than expected and there is a series of upgrade, he said, adding corporate India was “repairing” its balance sheet and preparing for future growth.

Insurance and mutual funds made domestic market vibrant, he said, adding there has been renewed interest from foreign investors after record outflows seen last year.

On the financial sector, especially in the private space, Jain said there was a “compelling long term growth story” as the Indian banking system remained “unscathed” from the global financial crisis and it was under penetrated. Moreover, non-performing loans were lower compared to other emerging economies.

On insurance, which is well penetrated but mainly used as investments, he said there was a near term “huge” unlocking opportunity as the current regulations permit only 26% foreign ownership.

Infrastructure, he said, was woefully pathetic, thus hampering economic growth although spends worth $500bn have been planned for 2008-12 but financing was a key challenge.

“Key segments like power, roads and highways and water/irrigation have to play a major role to ensure continuous infrastructure spending despite the slowdown,” he noted.

Jain also highlighted there were tremendous potential for outsourcing as “ the world is too interdependent for any large scale attempts at protectionism to endure.”

Cautioning on high consolidated (federal and states) fiscal deficit, he said it is expected to remain cyclically high at 9% of GDP, thus heightening the fears of crowding out and rising cost of funds.

Indian economy ‘can grow by 6% despite monsoon concerns’

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