Financial issues to watch out for

2010 is going to be a tough year. If 2009 was the year of the unexpected, 2010 may turn out to be a year of the unwanted — all ghosts that we feared may actually return to haunt us.
But it will also not be a year without optimism. Markets and men have triumphed over much worse and while the New Year may end up being a year full of challenges, it will also stimulate a combative spirit and end leaving behind a feeling of accomplishment and exhilaration.

So what all should we look out for in 2010? My list of 10:

1. Domestic consumption
This factor has been the most important in seeing us through 2008 and 2009. No doubt- backed by the award of the 6th Pay Commission which released Rs 50,000 crore in two tranches and a stimulus package which left a targeted fiscal deficit of 6.8% in FY11. The Pay Commission arrears have been disbursed and have had their impact on demand. In the absence of demand from the private sector, a 22% rise in government expenditure provided a necessary substitute. With employment and wages improving in the private sector, we can expect that the momentum should be maintained.

2. Inflation
Recast of the inflation index has laid bare what an ordinary consumer always believed — that his monthly bill was rising faster than what the wholesale price index seemed to suggest. The government has admitted this is largely due to supply side pressures and global prices of agri-commodities are also not providing any suitable alternatives. The monsoon — its timely arrival, quantum and distribution will be an important determinant of economic welfare in 2010.

3. Interest rates
Interest rates in India and worldwide continue to be benign. However, central banks have hinted at rolling back the easy monetary policy in 2010 and India may probably be ahead of the curve given that inflation is a concern. The biggest threat of this move is that it may end up stifling consumer demand before it finds a firm footing.

4. Credit growth
Credit growth which has fallen to an annual growth of 9.6% may also be a casualty of the rising interest rates. Capex plans may once again get postponed by entrepreneurs fearing slack demand.

Lacklustre credit growth numbers may also be due to the base effect of 2008 when credit growth by bank had ballooned due to extension of credit to oil companies and substitution of bank loans in place of advances by NBFCs which were passing through a period of stress.

5. US recovery
The jury is still out whether the US is finally out of the woods. While purchasing manager index (PMI) seems to be waxing and waning between signs of recovery and its denial, the unemployment rate is still in excess of 10%. With the weekly jobless claims at 480,000 and non-farm payrolls being lost per month at 11,000, one cannot expect recession to be really over.

6. Geopolitics
Parts of the world are warming up for reasons other than climate change. West Asia and particularly Iran and Saudi Arabia will be a trouble spot to watch. India and China’s peaceful co-existence and co-operation is extremely important for global growth.

7. Emerging economies
Dubai rattled the world briefly — maybe because $59 billion of potential default can still be absorbed. Nagging doubts remain whether this was an early signal of some more potential defaults. Emerging economies of East Europe, Ireland and some export-oriented economies are being watched with concern.

8. Domestic institutions and capital markets
The fund raising capacity of mutual funds has been hit due to the banning of entry load. The industry is trying to grapple with the situation and trying to find more cost-effective distribution channels. The opening of the stock exchange terminals opens up an exciting option, but cost issues will have to be tackled first.
The insurance industry continues to go strong, but if the Swarup Committee recommendations are accepted in toto, then it will be a major headwind for the industry, denting its ability to channelise domestic savings to the capital markets.

2010 will also be a year in which we should see vibrancy in the debt market. Regulatory moves to increase volumes in the secondary market should get a fillip from rising retail interest in this asset class.

9. Infra development
The resolve to construct 20 km of roads per day should be carried out in right earnest to add teeth to the infrastructure development programme of the new government. Against a target of 9403 mw of capacity addition in the power sector, only around 6900 mw has been added in the last 11 months.

10. Emergence of green tech
Never before in history has the entire mankind been
so concerned with its own survival. Damage to the environment, largely due to the use of fossil fuels is spurring the search for alternative
and greener options. 2010 may see more disclosures on this front and we will have more optimism for the generations to come.
The writer is chief executive,
DBS Cholamandalam AMC and
can be contacted at sanjaysinha
@dbschola.murugappa.com.
Views are personal