India Ecotrix - India's new tryst with destiny: AnandRathi Financial Services

For the first time, the global consensus is that India is the world's new growth leader. Currently, the country is also the largest recipient of foreign direct investment - another first - and one of the world's best performers in inflation control. Our study of the challenges faced by the economy concludes that much of the current concerns are overblown and India is well set to grow at an annual rate of 8-9% in the next five years, the fastest in the world. With the acceleration of investment and manufacturing-sector growth, we expect the Indian equity market to offer around 20% returns in the next one year.

Economy and corporate growth on the same page. India has maintained robust GDP growth while corporate sales are falling and profits growing slowly, raising doubts about the quality of GDP data. The incorporation of dis-inflation, however, aligns GDP growth and corporate performance.

Weather inflicting some pain. The third successive season of poor crops has dimmed the prospects for Indian agriculture. Coupled with the slow rise in administered agricultural-support prices and rural wages, low agricultural growth is likely to impact rural demand. This, however, is likely to be more than counter-balanced by improving investment outlook and manufacturing production. Moreover, low agricultural prices are keeping inflation low and thereby allowing the continuation of accommodative monetary policies.

Reforms slow, but outlook positive. Deadlocks in Parliament have clouded the reform outlook. While we expect reform efforts of the Central government to speed up after the Bihar elections, this is far from certain. Yet, it is important to realise that state governments are the main conduits for easing the conditions for doing business. With the rising electoral impact of economic factors and greater financial power to pursue their own policies, state governments are competing to usher in investor-friendly reforms.

A US rate hike largely immaterial for India. Beyond the immediate-term impact on cross-border flows and the exchange rate, with strong fundamentals, India is likely to remain largely unscathed by a US rate hike.

Chinese impact prime challenge. Given China's position, a slowdown in its economy would have global implications. While the resultant softer commodity prices are helping India, the possibility of a further rise in the already high imports from China is the biggest challenge faced by India. As a fallout of the Chinese situation, we expect India's share in global FDI to rise and that of FII to fall.

Positive on asset markets. With strong domestic fundamentals, improving public-policy outlook and a favourable global backdrop, we expect a 20% return on Indian equity in the next 12 months.

Source : Equity Bulls

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