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ShareEconomics, it is said, is a means of telling people things that they already know in a language they don't understand.
Siddhartha Sanyal, economist at Edelweiss Capital, did the opposite, simplifying the economy, the budgets, market expectations and inflation in his conversation with DNA . Excerpts from the interview:
What are your expectations from Union Budget 2009-10?
The agenda is one of supporting growth but their hands might very well be tied. The main constraint is the fiscal deficit, but the focus is likely to be slightly tilted towards growth.
The key to understanding the deficit is remembering that it is not only expenditure driven but also revenue driven.
With an improvement in corporate performance and profitability, service tax and excise also goes up. Better implementation would also help the cause of increased government revenue through taxation. One might see the deficit in much better shape, even if it is not in the next couple of quarters, then over the next year. So, even if there is not an immediate major shift in policy, one would not be too far away.
This time there could be a shift towards small-ticket expenditure which benefits a larger number of people and which could take the form of something along the lines of the National Rural Employment Guarantee scheme. There is likely to be a focus on improving life at the bottom of the pyramid. Indian policy makers are known for moving in a small measured way rather than go for huge changes all at once. A bigger thrust in the Budget could be expected in February.
Have the markets already toned down their expectations?
The elections were a surprise and a huge positive for the markets. In the euphoria post elections people started expecting a lot from the government. The source of money for many of the reforms that are expected is lacking. Now, the markets have come to realise the issues facing the government and expectations have been toned down to a more moderate, long-term basis.
But that is not to take away from the government's ability to get things done. Earlier, the hike in petrol prices would be something that could be debated for months. Now, it has been pushed through very quickly. Without the Left parties, it is a lot easier to push through reforms such as disinvestment. However, the operational part of divestment takes some time up to 6-8 months.
Beyond the Budget, what kind of trajectory do you see for inflation? Is hyperinflation a concern?
The term hyperinflation is more applicable when we talk of inflation in the range of 50-100%. I do not think it is applicable in the Indian scenario. The next calendar year will certainly see high inflation.
A huge amount of money has been pumped into the market. This is likely to chase commodities. And in India, inflation, like deflation, is an imported phenomenon. So, if all countries are going to be affected by it then India would not remain immune. In 2008-09, we saw inflation being recognised as a statistical phenomenon as much as it is a function of real world price movements.
So, a certain degree of maturity can be expected in the manner in which high inflation is perceived and dealt with.
Could the increase in commodity prices also be an indicator of a definitive global recovery?
The rise in commodity prices is a result of liquidity at this time. The liquidity has poured into oil and most base metals. Gold and equities have also seen an upside. The movement of gold and equity in the same direction is itself an unusual sort of phenomenon because the two traditionally move in opposite directions. What hasn't moved is steel.
Other metals such as copper and zinc are easily commoditised, but there are so many different types of steel that the movement of its price is more closely linked with the actual demand. Thus, a movement in steel is a better indicator of a pick up or recovery than movement in any commodity.
What kind of assets should investors buy?
I would advice that investors move away from financial assets and get into physical ones. If the value of money itself is going to be changing, then it makes a lot of sense to hold something tangible rather than otherwise. The value of a physical asset will be undiminished by any changes in the value of money itself. Equity as a whole should continue to do well. Those aspects of equity which are better backed by physical assets will do better than those that aren't.
