Monday, March 19, 2012

Kenneth Andrade: Budget Expects The Consumer To Grow The Economy

The mutual fund expert says that the finance minister has left very little room for error by presenting a practical Budget

Kenneth Andrade, Chief Investment Officer at IDFC Mutual Fund, is not a Budget freak. He believes that Indian companies have moved out of the domestic market and are more affected by the global economic scenario than policies announced in the Budget. Some excerpts from an interview with Forbes India.

How do you look at the Budget? Do you see any long-term impact on the market? It was actually a non eventful day. Over the last three years, we have been looking for a fiscal balance. In fact, budgets have not been able to do anything path-breaking for a long time. There have been no big implications on any industry through budgets. This year, there were talks about increasing the prices of diesel cars. That did not happen. I think it’s better to increase the price of diesel than the prices of the cars. I think somewhere down the line we will have a fuel price hike. As growth is coming down, the fiscal deficit is climbing. But as far as the capital markets are concerned, you can say that the Budget is almost becoming a non event.

While there are tax benefits to the middle-class, the excise on various goods has gone up. Do you think that this will increase demand? I don’t think it works that way. It doesn’t necessarily net each other for sure. The FM wants the consumer to pull the economy and put it into proper shape. But I don’t see any point in connecting these two things.

Do you think markets will continue to remain flat for the coming year as the Budget really did not have any incentives for the corporate sector? You have to understand that markets have been flat for the last couple of years. They have been in the range of 15000-20000 for a long time. Whether markets break out of here or not, there are some companies that are increasing their profitability every year. If we keep markets in isolation and look at corporate structures you will see that things are moving. A few years ago we talked about the outsourcing model in the technology sector. But in the last five years India has started to export balance sheets. If you leave out the banking sector, you will notice that India has been a net exporter of balance sheets.

Tata is the largest employer in Britain and IT companies have moved away from off-shoring or on-shoring model and have bought companies abroad and [are] creating jobs abroad. That’s the model that is significantly more value added than any other model. Earlier there was an arbitrage model. But now you are doing business in their countries and at their costs. Many companies have gross block that is higher outside India. These companies are not really dependent on the Budget any more. We all need to understand that we are operating in a market without boundaries. The Budget has largely to do with the economy. Corporate business models are expansive across the globe and are not just in India.

How do you look at the Indian economy now? The high growth of India’s GDP was based on asset creation. Now if we move back to the 6 percent of GDP, it is the representation of the investment economy slowing down. The slowdown is actually the slowdown of capital formation on the ground. There are two ways you can expand the economy. One is through investment and the other through consumers. The third is through outsourcing, but that model has fallen apart. The investment economy creates the job opportunity—taking people into rural markets and then putting them into organised markets and then you have to give incentives so that people spend more. Basically, we are in a cycle where an investment economy leads to employment which leads to demand which leads to capacity creation. We are in that trend. We are in a significant downtrend which won’t last for too long.

How would you sum up the Budget? It was a practical Budget because the fiscal deficit target that they set out to achieve is very much in line. They have given very less room for error. The finance minister had said that he wanted to put more money into the hands of the consumer in the current Budget which he has done by tax breaks to the middle class. The second important thing that has happened is on the infrastructure side. There has been a big shift in terms of policy. This has been done by giving incentives to the cost structure of the investment economy by lowering the cost of various raw materials in the entire system. The import duty on coal and LNG has been brought down to zero. Infrastructure companies can raise ECBs abroad at lower costs. This is all in the right direction. The Budget tried to make operational assets efficient and help generate cash flows to grow the entire economy and expects the consumer to take the lead to grow the entire economy.


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