Caution! Enter At Your Own Risk

Historical precedent shows that there is a high correlation among markets across the globe. This was amply demonstrated in how the sub-prime crisis in the US in 2008 sent ripples through economies worldwide. Later, the sovereign debt crisis in Europe rocked the world markets again. 

Even from the way the leading global indices are trading as of now, there seems to an element of synchronicity among them. However, the connect is appearing to get increasingly more obscure and roundabout rather than obvious. The way the markets have behaved over the past one year surely makes it seem so.

It is well known that the developed markets have been at the core of the global macroeconomic worries which are taking the equity indices southward. Ironically, though, the equity indices of developed markets themselves have been the best performing ones. In the year gone by, while the Sensex has gained around 10 per cent, the Dow Jones Industrial Average has surged by more than 18 per cent. The story is no different in the troubled European markets, with the FTSE having moved around 16 per cent higher and others like CAC 40 and DAX appreciating by over 24 per cent. Many of the indices are trading at multi-year highs!

Naturally, it has all been quite confusing. The returns from the emerging market are curiously lower in spite of their strong growth prospects, which those from developed markets have been higher despite them being in an acute state of distress.

With such mixed signals, what is the investor to do? Further, does this point at a larger trend? Are the developed markets becoming the new emerging markets in terms of generating returns? How will all this impact the Indian markets? These are questions everyone on the street is seeking answers to.

The Sensex is at striking distance away from its all-time high, and the street would be waiting for it to surpass itself soon. If it moves ahead, will it manage to stay at those levels? In this story, we try to get answers to these questions. 

What’s Cooking On The Global Front? 

When we are talking about global markets, we need to understand the current dynamics of the US, European and Chinese economies. Let’s take a look at how these key markets are behaving on the macro front. 

USA: Timing Of QE Taper Holds The Key

The US equity indices have witnessed a smart up-move in the past one year. What is surprising is that this has been amid all the difficulties like suppressed GDP growth in the first half of 2013, higher unemployment rates, and worse, the almost two week-long US government standoff. 

So, what is the reason behind the significant gains in the US equity indices? Well, we feel that it has more to do with the delay in tapering of the quantitative easing (QE3) programme. With the US Fed Chairperson designate, Janet Yellen being considered to have a dovish take on liquidity, the markets have managed to sustain the higher levels. Apart from that, the US is also benefiting from steady consumer and business spending, fuelled by a housing rebound, rising stock prices and greater willingness of banks to lend. The jobless claims have also witnessed some decline in the last three weeks.

However, while everyone is focusing on liquidity, which is mostly based on older data, it is important to understand the challenges that lie ahead. The first one is with regard to the sustenance of GDP growth. The IMF, in its recent forecast, lowered its FY14 economic growth out-look for the US to 1.6 per cent and that for next year to 2.6 per cent. This new estimate is 0.1 percentage point and 0.2 percentage points lower respectively than that made in July 2013. Apart from this, we are of the opinion that the US government has only postponed the tragedy on the debt ceiling front, and it is likely to resurface in the first couple of months of 2014.

If we consider the current macroeconomic scenario in the US, it is on a liquidity-fuelled high. If the steroids, i.e. liquidity is withdrawn, it is highly possible that these delicate tendrils of growth wilt. Hence in the case of the US markets, the timing of QE tapering is of significance. Further, the growth may sustain only if a long-term solution is provided.

Increased exports are a direct benefit that India has from US growth. More specifically, export-oriented sectors like textiles, pharmaceuticals and IT would be benefited by the revival in the US economy. Already in the September 2013 quarter, export-oriented segments have registered a good performance along with the usual suspects, i.e. IT companies.

The QE taper is also especially significant for Indian equities. Foreign Institutional Investors (FIIs) have been continuously buying in the markets here, and this has crossed USD 15 billion mark YTD. If QE taper starts, it would mean that FIIs may start flowing out from the Indian markets. The current rally is clearly being fuelled by liquidity, and a turning of the tide will impact the markets significantly. Though it is a given that QE will be taken away, how the US phases it out is important for the Indian markets. Any sudden stemming would surely affect the funds pouring into Indian equities.
[PAGE BREAK]

Europe: Green Shoots Visible 

The Euro zone, which spooked the global markets with the sovereign debt crisis, is also showing early indications of growth. The IMF has bumped up its growth forecast for the zone for 2013 to minus 0.4 per cent from minus 0.5 per cent, while holding the forecast for 2014 at 1 per cent. However, it has also said that recovery remains lukewarm and that the bloc is only just crawling out of the recessionary phase. 

The business confidence indicators suggest that activity is close to stabilising in the peripheral economies and already recovering in the core ones. Another recent indication of improvement came in from Spain, the fourth largest economy in the Euro zone, which emerged from a long recession with 0.1 per cent growth in the third quarter.

So, while all the usual caveats still apply, there is consistent evidence that the worst may be over for Europe’s economy. Needless to say, challenges like a weak and fragmented financial system, high private debt and depressed confidence continue to haunt the recovery. 

China: Early Signs Of Improvement 

Among the emerging markets, China is showing early signs of improvement. Recent reports suggest that manufacturing activity in China showed a better-than-expected uptick for October 2013, suggesting that the economy may have picked up steam just as the Communist Party leadership was preparing for an overhaul. The early reading of a survey of purchasing managers compiled by research firm Markit and released by HSBC touched a seven month high of 50.9. This was up from 50.2 in September and also higher than many economists had expected it to be (a reading above 50 indicates changes in the fundamentals of the expansion). This clearly implies that China’s growth recovery, which bottomed out in Q3 of CY2013, is now consolidating as we get into Q4.

However, certain concerns about the re-emergence of a credit crunch still persist. You may recollect that in June 2013, Chinese banks found it exceedingly difficult to borrow the money they required from their peer set. The interest rate for an overnight loan from one bank to another briefly hit 30 per cent on June 20 compared to a typical rate of about 2.5 per cent earlier in the year. This cash crunch or ‘Shibor shock’ (Shanghai Interbank Offered Rate, a benchmark interest rate) raised immediate fears of bank defaults. So, we can expect worries on this front. 

The Ripple Effect... 

We are of the opinion that the growth indicators in the developed markets are surely a positive for India. This would help the Indian markets in terms of increasing exports, and hence, would indirectly help to address the most important factor, viz. CAD.

But the question of liquidity still remains open. If liquidity tapering happens in the US, FIIs are likely to move away from the risky markets including India. Apart from that, the political scenario is uncertain, which may also keep investors at bay.

Indian Markets: The Current Scenario

The barometer of India’s financial health – Sensex – is trading at the 21000 level for the third time after touching its all-time high in 2008 and repeating the feat in November 2010. The all-time high for the index is 21228 on an intraday basis.
 
In fact, the recent rally in the Indian markets is completely driven by FIIs. These entities have parked almost Rs 13000 crore in just 16 trading sessions, taking the net buying to Rs 85588 crore on a YTD basis. This suggests that the domestic markets have rallied without any major changes in the fundamentals of the domestic economy and despite continuing concerns of higher fiscal and current account deficits, policy paralysis and rising inflation, along with rising interest rates.
 
To put this rally into perspective, on the global front, the markets have been buoyant over expectations of a postponed quantitative easing taper. It was no surprise that this extra liquidity would chase a risky asset class like the emerging markets. Here, India stands to gain on two counts. The continuous FII inflow would not only help the government to fund the large CAD, but is also expected to prevent the depreciation of the INR against the USD. This is coupled with domestic factors such as expectations of a Narendra Modi-led NDA government winning the 2014 general elections and the RBI’s efforts to maintain liquidity in the domestic market.
 
While there are certain positives, caution is still a buzzword on the street, with India having its own inherent concerns on the macroeconomic front. 

What Is Holding India Back? 

Before we can address the issue, we need to understand the cause. At the root of the various economic problems that India is facing today is the inefficient use of capital by the government. This has resulted in a high fiscal deficit, which is the difference between the government’s spending and its income. While a fiscal deficit maintained at optimal levels provides much-needed leverage to grow, the problem arises when the deficit becomes unmanageable. We have seen this happening in the European countries, and India may also meet a similar fate if the issue is not resolved. 

After the 2008 global crisis, governments worldwide started stimulus programmes to minimise the ill-effects. For instance, the US government bailed out banks, while China invested hugely in infrastructure projects. In sharp contrast, the Indian government came up with populist schemes like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) keeping in mind the general elections in 2009. Thanks to such schemes, the government started spending far more than the value of work done in reality. Put simply, a considerable amount of funds were not utilised to their potential and were spent more on purportedly ‘social causes’ rather than being invested in projects that would have aided capital formation. 
[PAGE BREAK]

Such schemes have put a lot of money in hands of those below the poverty line. Though this has increased the demand, a poor infrastructure supply meant that this could not be translated into actual production in the economy at the same pace. This is exactly what has resulted in higher inflation. The RBI started tightening monetary policy to curb inflation, resulting in higher interest rates, ultimately resulting in slow growth. Despite this, the government continued spending under its populist schemes. 

This huge government spending leads to a higher fiscal deficit, which pushes up the government borrowings. These populist schemes also resulted in higher labour costs, resulting in Indian industries losing their competitive edge. This also impacted our exports, which meant a higher CAD. The higher twin deficits then led to a weakening of rupee against the USD. 

In addition, the various capital expenditure (mainly infrastructure) programmes failed to take off due to various reasons such as delayed execution, permission backlogs or bleak economics of the projects. Many infrastructure project proposals were pending over environmental clearances. This effectively meant that the supply was not able to scale up to the demand, and compromised the competitiveness of the manufacturing sector on account of underutilisation of facilities. Even banks were shied away from funding infra projects as the non-performing assets (NPAs) from this sector were higher. 

All of these factors colluded to impact capital formation in the country, resulting in no additional GDP growth. The average return on capital employed has also come down drastically since 2008. This is clear from the subdued financial performance of India Inc. in the past four quarters. 

What Lies Ahead?

In spite of all these odds, the Indian markets are making an up-move as the street is betting high on strong global liquidity, anti-incumbency hopes, expectations of inflation contracting in the coming months and stabilisation of the INR against the USD. 

The general elections in India are due in May 2014, and the investor fraternity is counting on the newly elected government to not repeat the mistakes made by its predecessor. Policy paralysis has resulted in underperformance of Indian equities in relation to the global markets. Though the current government and the RBI have started taking steps to curb the fiscal deficit and CAD by various measures such as the curb on gold imports, fixing hedging costs for FII Inflows (Rs Cr) FCNR deposits, raising the overseas borrowing limit for banks to 100 per cent of unimpaired Tier-I capital, etc., it needs to think harder about how to control these deficits over the longer term.

Market experts are expecting that a BJP-led government would be more proactive in terms of bringing in reforms. However, we are of the opinion that even a Congress-led government may not disappoint if it emerges with a clear majority. In reality, what the markets are looking forward to is stability and a government with a clear majority, which should be able to tide over the frail policy approach faster.

As regards liquidity, the FII inflows are expected to continue till the US tapering of quantitative easing next year, which will keep the sentiments in the Indian market bullish. Further confidence will come from the fact that these inflows have helped the government to control the CAD in recent times.

However, the climbing fiscal deficit is still weighing the markets down. On one hand, in July 2013 and August 2013, exports registered double-digit growth and there has been a sizeable contraction in the import demand for gold. However, with the government’s expenditure continuing to rise, it will be tough to control the deficit at the targeted 4.8 per cent of the GDP in the current fiscal. Adding to the worries is the subsidies over fuel, fertilisers and food, which may cause the fiscal deficit to overshoot the target. 

With WPI and CPI still remaining above the tolerance levels, the RBI has increased the repo rate by 25 basis points to 7.75 per cent. There is a possibility of this going up by another 25 basis points till March 2014.

With so many issues pending for resolution, rather than bending over backwards to curb demand in a country with huge potential, long-term measures are in order to improve India’s supply-side dynamics such as agricultural and manufacturing growth. Though the newly elected government is expected to take proactive reforms in the coming months, it will take at least one year to provide considerable impetus to the Indian economy.

While there is some time before we see any substantial change on the home front, the US will probably start QE tapering before that. So, there is a clear gap between the time when excess liquidity from the US markets recedes and domestic factors start providing support. Hence, there is an urgent need to bring the macroeconomic issues in control during this period. Otherwise, the Indian markets have considerable chances of taking a beating, as the FII outflows would be at much faster pace than the investments that happen on the domestic front. 

So long as the supply-side dynamics are not addressed, inflation would remain high. And with the RBI having a single line of focus to control inflation, it would not take steps to ease liquidity. The combination of all factors could impact the earnings ability, which in turn determines the valuations of companies. 
[PAGE BREAK]

Earnings Growth: What To Expect?

Earnings growth is the primary factor that guides the movement of the indices With GDP growth witnessing a decline, it was obvious that the earnings would be hit. Over the last one year, the earnings growth of India Inc. has consistently deteriorated. Factors like higher interest costs, increased commodity prices and INR depreciation resulted in lower bottomline growth. The Sensex EPS estimates have also consistently seen downgrades in this period.

The markets always play on future expectations, and hence, investors would be more interested in what they may see in the remaining quarters of FY14. The September quarter results were expected to be moderate, in keeping with the macroeconomic situation. But the corporates have surprised for the quarter, with better numbers than the street’s estimate. We are of the opinion that this has more to do with INR depreciation and the benefits emerging out of the exports growth. Of course, the scenario is still unfolding, and the picture would become clearer as more and more manufacturing companies post their results. 

Global financial services firm Morgan Stanley has revised the FY14 EPS estimate downward to Rs 1260 from Rs 1315 and the FY15 EPS estimate to Rs 1400 from Rs 1540 earlier. As for India Inc., most players are upbeat with regard to their growth prospects for the second half of FY14. 

Does this mean an improved guidance for FY14? Well, we feel that while the downgrades are over, upgrades may not be seen either. Hence we would still stay with our EPS estimate of around Rs 1280 - 1315 and Sensex target of 20350. We believe that the markets would touch their all-time high in 2013. However, factors like higher interest rates and the inability to sustain margins would impact the performance of India Inc.

Stay On The Sidelines 

It appears that the markets are defying the principles of investing based on fundamental factors. Globally, the markets are up on the back of excessive liquidity being generated by QE. As for the debacle of Indian fundamentals, it is purely a function of populist actions taken by the UPA government to secure its position. 

The situation may change post the elections. There are also chances that the present government may unleash some reforms in a last bid to swing the corporate sentiment away from its political rivals. Future movement in the markets is clearly dependent on political outcomes, and not on economic fundamentals. Thus, the markets are going to react based on technical trends in the coming few months, until a clear economic trend is established. 

Considering the fact that markets are at their peaks, it is advisable for value investors to book profits wherever possible and sit either on cash or short-term liquid debt instruments, staying on the lookout for safer investing opportunities. 

With the valuations slightly stretched as of now, the risk-reward ratio is not in favour of rewards. Hence, investors are advised not take any fresh exposure in the markets. A prudent strategy will be to book profits and wait on the sidelines. While we advise retail investors to be cautious at the current levels, this is a good market for the other strata, i.e. day traders and speculators, to ride on the opportunities arising out of news flows on the political arena.
[PAGE BREAK]

“Topline is Vanity, Bottomline is Sanity – Only Cash Flow is Reality”

In the current market volatility, with the highs as exuberant as the lows are dismal, keeping the performance of stocks in perspective is important for investors. Bharat Shah, Executive Director, ASK Group shares with us his investment philosophy and tells us why it is important to choose quality of growth rather than buying mere arithmetical cheapness

The indices are a striking distance away from their all-time high levels. Why is there still no conviction in the markets?

I will not say that there is no conviction in the market. Actually, many good quality businesses are quoting at their all-time highs. On the other hand, businesses which were stretched in terms of borrowings or inferior quality of business are now coming to the surface more clearly. Those are the businesses which have been impacted.

Of course there is an overall challenge on the growth front, as the GDP is growing at 4.5 per cent. Obviously, there is a relationship of the GDP growth rate with the corporate growth rate. Thus, it obviously means that the businesses are growing at a slower pace and that in turn affects the bottomline growth as well.

Apart from that, I think that there have been challenges in capital formation, as well as issues about falling capital efficiency of the corporate sector and economy. These issues are making participants more cautious. But considering the overall scenario, it will not be appropriate to say that there is a lack of conviction. In fact, I think if we look at the good businesses, the level of conviction shown by the market is pretty robust.

What are the factors that are putting brakes on the growth engine? What measures should be taken to bring back the earlier growth?

Among the principle challenges, one is of a high fiscal deficit. This, in turn, is resulting in high inflation, which in turn is not allowing the interest rates to come down as much as we want to see. Thus, inflation has become sort of stubborn, and there is a worry that it is getting more structural. The supply-side dynamics are the key issues that need to be resolved.

The effect of spending locally more than what we have in revenues is reflected in the inflation and in the interest rates. The similar effect of spending externally more than what we are earning in the form of imports is being reflected in the weakened rupee. That, in turn, has its own implication in not permitting interest rates to be reduced.

The twin effect of higher spending domestically as well as externally is resulting in inflation being more structured, interest rates having hardened, the inability of interest rates to come down and the rupee becoming much more dependent on the technical situation (flows being balanced or unbalanced) rather than on the long-term fundamentals of the rupee.

The other issue is that capital formation has slowed down materially, for a variety of reasons. The new capex programmes are either delayed, halted or deferred. This is due to the raw material linkage, permissions to be obtained or the economics of the project becoming uncertain. This is affecting fresh GDP growth.

The third issue we are facing is that infrastructure investments have being impacted again, which has affected the competitiveness of the manufacturing sector. All these issues put together have resulted in a lower overall GDP growth rate than what we would like to see. 

For this to be moving ahead, the capex issues will have to advance. For projects which have been halted, clearances will have to come so that the supply-side dynamics are resolved. This, in turn, will help in reducing the pressure of inflation and at some stage, will allow the interest rates to moderate.

Basically, the fiscal deficit will have to come down in order for the macro situation to look more comfortable. A drop in inflation is nothing but an improvement in the GDP growth rate. So, those issues need to be taken care of.

The manufacturing sector’s competitiveness being hit and infrastructure being halted, plus other cost issues owing to inflation have resulted in falling capital efficiency for various businesses. The average return on capital employed in 2007-2008 was about 21.5 per cent. Today, this has probably dropped to about closer to 16.5 per cent. This means that capital intake has gone up, but the corresponding output has not come by. This is also reflected in the incremental capital output ratio, which I think was lower than 4:1 five-six years ago. Today, it is about 5.5:1.
[PAGE BREAK]

The CAD is showing signs of decline. Do you feel the government would be able to contain this below the target of USD 70 billion?

From the numbers so far, it does look like it may go below USD 70 billion. But the key issue is not finding resources to fund the CAD. On a long-term basis, it is more important to resolve the occurrence of CAD itself.

When there is pressure on the rupee, it is crucial to find a capital inflow and outflow balance on an emergency basis in order to prevent the rupee behaving in a volatile manner. Having resolved that hopefully, the longer term issues remain as regards how we should spur our exports and how we can have greater handle over our imports such that we are able to contain the overall deficit within a reasonable ambit.

As a country, we are importers of crude. Do you feel that will play an important part, with subsidies also putting some pressure?

I guess it should be. I mean, if we make crude and petrol prices completely market linked, then automatically all the consumer sections would be required to use the resource more efficiently. Really speaking, I am not being able to understand that why we should have subsidised petrol so far. Petrol is essentially an item of consumption either for four-wheelers or two-wheelers. I do not know whether that segment should really have enjoyed subsidised rates so far.

Obviously, petrol prices are more open now, but diesel continues to have subsidies. To the extent that there is a subsidy, it does not force the user to utilise a resource as efficiently as required. In other words, when you make the market pay the full price for the resource, you are forcing it to use the resource efficiently, find substitutes over a period of time and improve productivity so that overall usage of that resource comes down. All of that on a long-term basis results in greater efficiency.

As regards the fertilisers subsidy too, consistently having urea at very cheap prices has resulted in silent issues cropping up. Excess usage of nitrogenous fertilisers and complex fertilisers has implications on the soil fertility, which has hampered the productivity of output over a period of time. These issues may actually end up costing us much more than the subsidy burden of urea itself. Plus, the overall fertiliser pricing regime has resulted in greater imports rather than getting them produced locally, which would be more cost effective and more efficient.

The fuel and fertiliser issues really need to be addressed, as these form the biggest items in the subsidy bill. As regards food, I think long-term issues can be resolved by making warehousing and stocking arrangements for agriculture and the coal storage facility.

What are your views on QE tapering? 

It would happen at some stage, and should happen for the betterment of the US itself. How long will the US keep compromising its economy to artificial steroids to the extent that it does not even feel the pain? But the moment you remove the steroids, the patient may simply be too weak to even step down the bed. So, even from their perspective it is vital that it be withdrawn. In any case, we have to be prepared that it may happen.

Chances are that we receive advance intimation on this, and to that extent, I think that it may not affect us.
[PAGE BREAK]

Are the valuations still reasonable or fair? 

I think by and large the valuations are fair. There are still strong businesses which are growing at pretty attractive rates. They are not exactly cheap, but I don't think they are expensive either. High quality businesses in the consumer space, select banks and NBFCs, some very select agro businesses and automobiles, many of these are performing quite decently at this period of time.

On the other hand, a lot of businesses are cheap arithmetically, but they are impacted. Either the quality of their businesses is impacted, or the external situation or cost structures cannot fully absorb the rates in terms of making profits.

Some of the businesses have major balance sheet issues to deal with, and they have no foreseeable ability to update. These businesses have a variety of challenges, both internal and external. The external challenges may go away at some stage, but the internal ones are where the balance sheets are burdened and the businesses are not very capital efficient.

Investment is simple, but not easy. What should one look at when investing?

First and foremost to my mind, the size of opportunity is a very critical issue. It is not about how big something was in the past or has become today, but more about how large it can get from where it stands today. Thus, it is less about the past but more about the future.

More than the size of the fish, it is the size of the pond that matters. So, the pond has to be large, only then a capable fish may acquire a respectable size. In absence of that, the opportunity gets diminished. So, the size of opportunity is a very fundamental idea and one should not get into investing into a business which is attractive only on other parameters.

The second factor, which is a by-product of the first, is growth. Ultimately, winning investments become compounding machines when the earnings grow relentlessly. This does not necessarily have to be at the highest rates. Even if you take a reasonable rate of 10-15 per cent for a long period of time in a durable, predictable and a relatively less volatile manner, there is huge compounding potential. These businesses enjoy fantastic valuations in the eyes of the markets market as they almost acquire an aura.

I must mention that when I say growth, it does not mean just topline or bottomline growth. It is really the growth of the cash flow over a period of time. Topline is vanity, bottomline is sanity and only cash flow is reality.

The third aspect, linked to the first two, is that only when the opportunity is large does compounding growth become possible. This is not automatic, but has to be earned by a capable management. This has to do with the quality of management in terms of integrity and fairness, in terms of vision to see ahead, and the ability to execute that vision on a long-term basis.

Capital distribution and allocation are two tell-tale signs of the difference between a good management and an inferior one. A good management has a great capacity to allocate capital in a judicious manner amongst competing opportunities, and makes a relentless effort of ensuring capability by distributing unnecessary amount of cash from the balance sheet.

The fourth aspect is the quality of the business. It is impossible for a business which is inferior to create economic value, and if a business cannot create economic value, it cannot see price appreciation. Still, if a weak business acquires a strong stock price, it is bound to fall flat. You cannot suppress the valuations of a good business or its stock performance for a long period of time. Fundamentally, a business should have the capability to create an economic barrel for a stock price to expand. Economic value will be created when the business fundamentals earn a return on the capital put to work greater than the cost of the capital.

Finally, the package of these attributes to price, which is a sensible margin of safety in your favour. This is nothing but the price that you pay compared to the value that you get. These, to my mind, are enduring ideas over 300 years of organised investing with regard to which businesses perform well.

Many a time, there is a myth that the stock prices are dissociated with what is happening to the business. Even if the price may temporarily have no co-relation with any real value or situation of the business, it is impossible to believe that this can happen on a more enduring basis. When we buy a business, it is the same as buying a stock. So, it is not about paying what the price is, it is about acquiring a part of the business.

The three philosophical overlays I would add are: a) I would always prefer to acquire a business even if it has a relatively more modest growth of earnings but is certain as compared to a dazzling but uncertain growth. b) Secondly, the quality of earnings growth is a far more important idea than the quantum of growth. c) Third is the quality of growth. By this I mean that buying quality at a reasonable price is a far superior idea than buying arithmetical cheapness which is masking inferiority of the business behind.

High quality businesses rarely can be available at mouth-wateringly low multiples. I do not agree with the fact that PE is a good way to value businesses. It is a myth that high quality businesses can be available at single-digit valuations. So, buying high quality at a reasonable price has to be revised instead of buying inferior companies and justifying it in the name of cheapness. This, I would say, is the overall conceptual framework.

We are due for elections in 2014. What are your views on the political front?

I will not like to make any political forecast, because that is not my domain. I would not like to indulge in any guesswork as to what is likely to happen, but I would definitely say that we have empowerment issues to deal with on the twin deficit front. In turn, we have to deal with inflation and in turn the interest rates. Capital formation is being affected partly due to interest rates being high and partly due to the overall sentiments, as well as by the fact that capital efficiency has come down. This is affecting the growth rate. It is a cycle, and I think we need to break the logjam. The important issue here is to get the supply-side initially in place and not to dampen demand in order to tame inflation. That is where I think the long-term solution lies. Whatever may be the political formation, these are very crucial points with regard to wealth generation, income generation and employment in the country.