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Government should focus on reviving investment cycle in Budget: Prabhat Awasthi
June, 26th 2014

ET Now: Expectations are running pretty high from the Budget. What is it that you are expecting? Does the government have enough elbow room for announcing big-ticket reforms?

Prabhat Awasthi: Budget is statement of finances of the government and reforms can happen outside the budget also because essentially, there are two functions of budget. From our perspective what budget does in terms of fiscal consolidation will be important to take a future view on a number of important macro variables, including how does interest rates move, inflation move going forward, whether the government has more impetus on consolidating now and giving a push to investment cycle.

ET Now: The main task the government faces is how to kick-start the investment cycle. We are hearing noises that the government is trying to de-clog the credit market, they are trying to make life easy for companies by giving them faster approvals. Do you think these measures will go a long way in fixing the credit cycle and can it really kick-start the investment cycle?

Prabhat Awasthi: They will definitely help. There are a number of things that could happen and, as I said, it is early days. It is only one month of the new government. One of the first things that seems to be happening in the government is about the decision making process itself. The abolition of for example the group of ministers is one such thing which gives more power to ministries and will help in quicker decision making. From what we understand from Delhi also is the fact that the process of decision making in itself is going to much quicker as we have seen in case of railways, for example. Or for that matter we have seen that the diesel price hikes have started again and the fact that they have said that they will come back on the gas price and three months is not that long a timeframe even though market expectation may be much higher.

So clearly if the decision making process gets quicker, a number of projects which will be stuck because the government clearances will start to happen or start to get executed, that will definitely improve the process of de-clogging of the entire system. So I agree with that. We have to give them time because the expectations have been very high, but the fact that there has been deep malice in the system will take some time to rectify.

ET Now: In his first statement post being appointed, the Finance Minister, Mr. Jaitley, emphasised the need for fiscal discipline. What number would make the markets happy and do you expect him to give medium-term targets for bringing down stake in centre deficits?

Prabhat Awasthi: The central government will probably talk more about central deficit to start with. As long as there is a consolidation, the market will be okay with it. The second more important thing will be about how this consultation is being achieved. Is it through cuts in subsidies or is it through the so-called one-time revenues such as disinvestment. So both the quality and quantity of deficit will be important. Obviously this is a medium-term statement, but these medium-term statements are already in place as to what they want to achieve in three years. The question is whether these targets are credible and are being met through credible means. That will be more important to the markets than just a broad number as to what they want to do in three years.

ET Now: So do you expect overhaul of the subsidies and do you expect some tough decisions on that front?

Prabhat Awasthi: It's very hard to say because again, this is based on our own wishful thinking and we will have to actually see what the actual decision will be. There have been some indications through. We have seen railway fare hikes, for example, but on the other hand, we have also seen the Finance Minister say yesterday there is nothing, at least at this point in time no proposal to raise kerosene and LPG prices. They will reduce subsidies over a period of time either as a percentage in GDP or in absolute terms, but it might be a more gradual process than the market has come to expect. We must also realise that the economy itself has being distressed and causing a massive compression of subsidies on one go might actually reduce the growth rate much faster and much more than the market or the economy has stomach for. So it could well be a gradual process. As long as I said, the direction is right and there is a roadmap laid, we should be fine with it. But I would think in the end, better targeting of subsidies, phasing out some of the more non-productive subsidies, that direction itself can be fairly positive from the market perspective.

ET Now: Which sectors do you expect the focus to be on in the budget?

Prabhat Awasthi: First of all, the budget is again, I would say, a statement of finances. It is not about doing reforms. It is more about how do you allocate capital to various sectors. So if the government is going to be focussed on infrastructure, they might raise budgets in infrastructure or defence spending. I mean they want to focus on defence. But to say that all the reforms should be part of the budget is not right because those are decisions which vest with the respective ministries.

I think that from the government's perspective where the government intervention is the heaviest and where the government action is most needed, is probably infra. Finance raising being made easy for infrastructure and any tax sops getting extended for infrastructure are the kind of things can be done in the budget. I think that if the infra sector just does get a lot of push in the budget, then that will be positive. That will be not only positive from that sector perspective, but it is also a long-term positive for many other sector perspective because so long as the investment cycle keeps going, ultimately consumer demand recovers, bank credits start to grow again and you can take a long term view on supply side getting better. So from my perspective, probably these capex-heavy infra sectors should see a boost in the budget.

ET Now: What about GST and DTC? Do you expect some clarity on rollout of these issues?

Prabhat Awasthi: It is very early because the government had just come into power. GST has essentially been stuck because states have not been on board and I am not sure that we are ready yet. In terms of the processes that need to be completed to roll out GST, you can always give a roadmap which has been happening for a long time in the budget, it has always been deferred by. It is too early at this point in time, since the government has been in power, to expect GST to happen immediately. That might be true also for DTC and it can actually happen separately through an act. So I do not think it has to be part of the budget. I think that there will be some more time before you will see these initiatives being taken.

ET Now: The business climate was also affected because of a lot of confrontation between India Inc and the government on tax issues. Do you expect the government to provide clarity on contentious issues right now?

Prabhat Awasthi: The present government seems to have said on many occasions that they need a stable tax regime and hopefully, that is what they will deliver. So I think that there will be some positive action on that front.

ET Now: Midcap stocks have been flying around. Many of the midcap stocks are up 50 per cent to even 100 per cent from the recent lows. What do you like from the midcap space because that is where all the value is, that is where all the hidden gems are?

Prabhat Awasthi: First of all, we do not cover many midcaps and unfortunately as a sector, we do not cover it. So it is very hard for me to comment. The general comment will be that there was a lot of undervaluation because there was a fair amount of pessimism in the economy. Some stocks are trading at two-three times. A stock which is trading at two times is hard to justify at that value and at six times also it is probably cheap. So if the economy is recovering, there could be poor performance from midcaps. That has always happened in the past when the economy recovers and this time, it is no different. But what you have seen is the first phase of valuation corrections, also in large caps. The depressed large caps have done better than large caps which had been performing before. That action is more strongly reflected and is stronger in the midcap space and that is something that you can expect to continue to happen over a period of time if the economy starts to do well.

ET Now: Energy price hike has been put off till September end. How big a negative could it be for E&P companies?

Prabhat Awasthi: We are positive on energy. You cannot expect all delivery to happen in one month. That is what the market seems to have expected. Every news flow that happens in the market is taken as truth. For example, the kerosene price hike flashed on every television screen two days back and the government said it is not on the agenda right now. So what the government has said, we will take some more time to study it. They have just come to power and if they think that this is an important decision which needs to be studied further, that probably will happen. So they will take rational decisions, but we have to give this government more time before judging every decision as final. I think that there will still be a hike, but the form and the extent of which will probably have to be decided because the new government is saying that we want to do more work on this before we come through. So I would not be necessarily negative on these names. But it is just that some of the froths will get out and there might actually be more value as that froth goes out.

ET Now: Let us talk about consumer discretionary. The government has also extended the excise duty cut for auto and capital good players. Do you think this will be a big trigger for these stocks at least in the medium term?

Prabhat Awasthi: Definitely, it is positive from companies' perspective because if the prices had risen even 4-5 per cent, there would have been slowdown in demand. There is some recovery which is happening in for example the auto space. That obviously would have been affected. So any duty concession is positive and there is no doubt about that. But it is a six-month thing. So the government probably expects that there will be some recovery in demand which will be natural and that will allow them to roll back. Eventually, the sops will have to go because they have been given as an emergency measure, given the stress in the system. You cannot keep pricing this indefinitely. So short term positive, sure, but ultimately what matters is the fundamental demand which is driven by rising consumer incomes, etc. in which case you will not need these sops. So it is a positive, but I would like to see a longer-term demand recovery happen that is always a better thing from a sector perspective.

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