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Earnings growth to pick up as business recovers from initial impact of structural reforms: Robert Baur

LiveMint logoLiveMint 21-09-2017 Ami Shah

Robert F. Baur, executive director and chief global economist at US–based Principal Global Investors LLC, expects corporate earnings growth in India to pick up in the 2019 financial year.

In an e-mail interview, he said he expects the short-term negative impact from implementation of recent structural reforms such as the goods and services tax (GST) and demonetization to fade over the next one year. According to its website, Principal Global Investors manages more than $431.9 billion of assets. Edited excerpts:

Indian equity markets are hovering near record high levels, while an earnings recovery is yet to happen. Do you think the rally in the markets is here to stay?

Earnings growth in India will pick up as business recovers from uncertainties around the GST, demonetization and NPL (non-performing loan) recognition. While earnings growth for FY18 would be lower than initial estimates, the growth for FY19 could be better as metals, infrastructure and related sectors and financials should do well. So as long as global interest rates stay low, economic growth picks up a bit, and the US dollar stays relatively weak, the rally is okay.

With expectations of a rate hike in the US, India may lose some of the competitive edge of offering higher yields. Despite this, do you think that strong macros and potential of higher growth will help India attract inflows?

Higher interest rates in the US would certainly have an impact on flows into EMs as a category, especially if the rates at the longer end reach close to 3%. However, positive structural reforms, improving growth and better earnings growth should help attract inflows. In addition, interest rates in India are higher than in developed countries, which will help attract inflows.

Rupee has been a stellar performer on the back of fund flows. India has also topped many emerging market peers with rising reserves of over $400 billion. What is your outlook for the currency in the context of slowing external demand and actions by global central banks?

The US dollar’s weakening trend is likely over so the rupee has likely peaked. But improving growth and positive structural changes should keep the rupee relatively robust. In fact, as the rest of the world economy starts to decelerate a bit in 2018, the Indian economy could be rebounding from the GST, demonetization and NPL recognition. This improvement could also help the rupee.

India’s GDP growth slowed to 5.7% in the quarter ended June, the slowest in three years, from 6.1% in the preceding three months, sparking concern over the state of the economy. What are your thoughts on near-term and long-term prospects of India’s economic growth? Do you see it ranking among the top world economies over the next decade? If yes, how and when?

Recent growth has weakened from the impact of business uncertainties related to the GST, demonetization and recognition and provisioning for bad loans. Once the negative impact of those structural reforms starts to fade, near-term growth should pick up. Those structural reforms should also be quite positive for long-term growth. So, growth in India right now is already among the fastest of world economies. If that continues, reforms plus excellent demographics suggest India has an opportunity to become a much larger economy over the next decade or more.

Primary market offerings in the equity market are surging. Do you think this could hurt the secondary market going ahead?

Strong acceptance of new equity offerings is a positive sign for the overall market. Many of the offerings have expanded the choice set for investments as many of them are from sectors which are currently under-represented in the listed markets. However, it is a fact that as the bull run continues, there could be some froth in the new issue market and investors would need to be applying their judgment.

What will be the theme for Indian economy and markets over the next one year?

The next year should see a fading negative short-term impact from structural reforms. Those reforms have had a short run negative impact but should be very positive for the long-term. Over the medium-term we see rising tax-to-GDP ratio as the formal sector becomes a bigger part of the economy and as more transactions take place using non-cash means.

Demonetization was not a success, contrary to earlier expectations. What are your thoughts on the bold move by the government?

The success of demonetization will not be evident for a while. We expect that its positive impact will take a while to become evident, but will become evident at some point.

What are your thoughts on GST? Do you think too many bold reforms back to back are a bad idea for India’s economic growth engine?

Many bold reforms often have a short-term negative impact even if that is very positive in the long run. The GST will likely be in that category. Having taxes equalized across the states in India is very helpful for business and helps cut costs of transport across state lines. It also is positive in that it likely reduces the occurrence of small-time corruption. It will also bring more enterprises in the tax net and while its near-term impact will be formalization of the economy, over the medium-term it should lead to better tax collections.

Bad loans have been nagging problems for state-owned banks in India. What are your thoughts on the resolution process? Is this a problem bothering other economies too?

The RBI (Reserve Bank of India) has done the right thing in encouraging banks to recognize and provide for their NPLs Though it is a long process, the banking system would be much healthier as a result. Yes, other economies, especially China, have debt rising faster than nominal GDP. The Bank for International Settlements has been warning of the dangers of excessive debt levels.

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