Major themes to impact India in 2017 include resurrection in consumption demand, growth led by policy reforms, move towards digitization, monetary stance of global central banks and economic policy decisions.
The impact of demonetization may weigh on consumption demand and on the growth of various industries in the near term, dragging down the GDP growth for FY17 by 50 bps. The approval of promulgation of the Special Bank Notes (SBNs) (cessation of liabilities) ordinance by the President of India could likely bring about a gain to the government on account of allowance given to the RBI to extinguish its liability towards unreturned SBNs. We expect the impact of this currency replacement program to be short lived as new notes come into circulation (45% back in circulation as on December 17th). Additionally, this move should help to increase the share of formal economy and digital economy. Improvement in consumption demand is expected to be a major theme for 2017 supported by a gradually rising rural wage level, implementation of the 7th pay commission, lowering of interest rates in the Indian economy and continued government spending.
Policy reforms led growth – Interest subvention of 3% and 4% for housing loan announced in December may boost low cost housing segment. Post the fixation of tax structure by the GST council, GST law now awaits implementation in 2017. This simplification of tax structure along with reforms pertaining to land, labor, infrastructure sectors and modification in FDI policy could contribute to sustainable growth over medium term.
Global factors including commodity price movements, economic policies of the new government in the US and monetary policy stance of global central banks could have a bearing on capital flows to emerging markets like India. A likely rise in inflation pressure in the US from wage rise and expansion in the economy should elicit future interest rate hike actions by the US Federal Reserve in 2017. Global growth rate is likely to improve, led by the US and other emerging economies in 2017 which could benefit the Indian export oriented sectors. That said, India’s lower linkage to global economies makes the domestic macro factors and fiscal trends the key catalysts to determine growth.
Improving fiscal situation, inflation rate, exports growth, rising FDI flows point towards fundamental stability in the economy which augurs well for long term equity investing. Domestic corporate earnings volatility may increase as corporates attempt to tide over the impact of currency replacement program. Earnings for FY17 are expected to be lower than estimate with EPS growth likely at around 10%. Consensus earnings growth for FY18 is expected to be healthy at high teens. The fundamental strength of the economy and attractive valuation levels of the market (1 year forward P/E for BSE Sensex at 14.7x, moderate levels implying low risk) present a positive outlook for equity. Periods of interim weakness in equity market should be considered as investment opportunities for long term investors. We recommend a systematic investment in diversified equity funds & hybrid funds to benefit from the current volatility and participate in the growth potential of Indian equities.
Anand Radhakrishnan is Chief Investment Officer – Franklin Equity, Franklin Templeton Investments – India.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.