'Investment not gathering momentum will be a big risk factor for the economy'

'The government is trying to kickstart the investment cycle in India and while the corporate investments are yet to gather momentum, there are early signs of the same.'

Anand Rathi, chairman of the Anand Rathi Group, discusses Budget 2022 and the headwinds and tailwinds facing the Indian economy with Prasanna D Zore/Rediff.com in the concluding segment of a two-part interview.

• Part I: 'International factors are a bigger risk to equity markets'

How would you rate the Union Budget based on how it will help boost economic growth?
What are the major initiatives that will impact economic growth positively as well as negatively?

The Budget is a continuation of the policy measures initiated by the government particularly since September 2019.

Through series of measures including Atmanirbhar Bharat, production link incentive scheme, considerable cut in corporate tax rate and measures to improve conditions for doing business, government is trying to boost growth through acceleration of investment.

As a first step towards this, the government has substantially increased capital outlay for public investment. As we had seen between 2004 and 2008, an investment-led growth recovery cycle is generally very positive for the equity market.

Return of such policies bode well for the medium to longer term outlook of the Indian equity market.

There are views that rural demand remains relatively depressed compared to the urban demand. It is being also felt the state of micro small and medium enterprises is not particularly good. The Budget has initiated some measures towards this.

For example, the target for public procurement of food grains has been increased. Budgetary allocation for the agriculture and allied activities also has been enhanced on the top of significant increase in the last two years.

Similarly, the credit guarantee scheme for micro small and medium enterprises has been extended for another year. A separate allocation has been made for the hospitality sector which has been impacted by the pandemic.

Do you think the expectation of interest rates rising could emerge as one of the major headwinds dampening the animal spirits of India Inc? What are the other major headwinds should the economy brace itself for?

In the latest monetary policy, the Reserve Bank of India has considerably toned down the inflationary expectation for the next financial year. In practice also, India has not witnessed the kind of hardening of inflation which has taken place in the US or in the European Union.

Consequently, the pace of monetary policy tightening in India may not be as aggressive as in some other countries or what is currently being envisaged by many.

At the same time, in anticipation of rate hike and liquidity tightening, bonds rates have gone up considerably and even banks have selectively started increasing lending rates.

Currently, the liquidity situation remains extremely accommodative and the liquidity surplus condition is likely to continue and hence the bond or the bank lending rates are unlikely to go up considerably.

As a result, while the increase in policy rate remains a risk factor, I do not think that it will have major impact on the equity market.

The government is trying to kickstart the investment cycle in India and while the corporate investments are yet to gather momentum, there are early signs of the same. Investment not gathering momentum will be a big risk factor for the economy.

High global oil price is another factor which can have some negative impact on the economy especially by keeping inflation high.

Continued subdued demand situation in rural India and deterioration of the situation in the informal sector including micro small and medium enterprises are other risk factors.

How would rising interest rates and tapering of liquidity by the US Fed affect the Indian economy and equity returns in emerging markets like India?

Past experiences suggest that transmission of rate hike by the Federal Reserve into the bond market is generally low. On a forward looking basis, the market factors that in before the actual rate hike starts.

This time also we have seen the yield in US has started rising before the scheduled start of monetary tightening. Moreover, in the last two episodes equity markets performed well during the phase of monetary policy tightening by the Federal Reserve.

Therefore, there can be some near term negative impact of the rate hike by the Fed on Indian equity market, but I believe the impact will be largely transitory and in the medium to longer term Indian equity market would be driven more by domestic factors including the fundamentals of the Indian economy and corporate performance.

In that sense, the traction in corporate earnings growth is a much bigger factor than the rate hike by the Federal Reserve or by the Reserve Bank of India.

Finally, what's your vision for the Anand Rathi Group for the next near-term and long-term?

Our vision is to achieve higher growth in all our businesses particularly Wealth Management, Broking and NBFC. Our goal is to be among the top five players in every business we are in. Fortunately, our businesses have grown extremely well even during last two years of pandemic and hence our businesses are geared up for faster growth in years ahead.

Anand Rathi Wealth Limited is the first company of the group to go public and our IPO had received excellent response even during difficult times and post listing, performance is far better than many other IPOs done during that period.

• Union Budget 2022