Market reaction to the budget 2013 is disappointing: Jim O'Neill, Goldman Sachs AM

In an interview with ET Now, Jim O'Neill, Chairman, Goldman Sachs AM, gives his views on the Union Budget 2013. Excerpts:-


ET Now: What is your first reaction to the budget and as a portfolio investor are you satisfied with the budget maths?

Jim O'Neill: The markets do not seems to be very impressed. There is obviously something that has been a bit of a negative surprise. It seems to me there were underlying issues that make the budget background difficult. Market reaction shows that they are not happy about the macro framework. The market’s reaction is a bit disappointing.

ET Now: Do you think budget or no-budget India be outperforming emerging markets this year? India emerged at the top of the heap in 2012, do you think India will once again emerge as a top performing market this year as well?

Jim O'Neill: China is going to be the place to be out of BRIC countries this year. China is showing two really powerful signs. One, is that it is picking up recovery after this big slowdown last year. Secondly, China is showing lots of signs of rebalancing as it goes to this new phase of growth. It is being less dependent on its old model. It is being less dependent on exports and that is a very good thing. That is why the Chinese is likely to continue to be the better of the major emerging markets.

In case of India, there were underlying issues that the government has flirted with but has not really come to grips with that. I often find myself thinking that may be Beijing and Delhi should swap places in terms of their policy style. India needs a much stronger and at the same time simple framework for macro economic policy so to have clear path for deficit reduction in the future. To really focus on a low and stable inflation rates, some kind of monetary policy anchoring has become important. Also, large part of emerging world and the macro policy framework is as always quite confusing for many people. On top of that markets were always looking for Delhi to grant more openness and more attractiveness for foreign investments. There has been some progress made in that direction but against the background of continued creeping Indian current account deficits, it is important because India needs more foreign capital and not just portfolio capital.

ET Now: The India story always has been great demographics and strong consumers but given the way how Indian inflation has moved in last three years, are you getting a sense that Indian consumer is slowing down and that in essence is negative for Indian equities?

Jim O'Neill: The macro policy framework has not been helpful for sustaining Indian growth. The pick up in inflation is of course an issue that has slowed a number of parts of the economy including the consumer. The big picture in the Indian story is based on the strength of the demography and the urbanisation of India's huge population. This is one of the reasons why I have talked about for years the importance of putting low and stable inflation. I continue to frankly mystified as to why Indian policymakers do not adopt some kind of inflation target as the core to their macroeconomic policy given how important these issues are for Indian consumers particularly the lower income ones.

Swaminathan S Anklesaria Aiyer: We have had this transformation of the Indian stock market. It started off very strong and has gone all the way down apparently because of an issue about Mauritius whether certain tax issues will be opened up. If the Finance Ministry just comes out with an easy clarification on that, do you think we will get a quick reversal or do you think there are more serious questions on whether or not the Indian tax people are getting their knife into the foreign investor to somehow extract money one way or the other?

Jim O'Neill: If there was some clarity given about the Mauritius tax issue it might have caused a rally. It is striking that today's market disappointment comes against the background of a very strong market around India. Tokyo is nearly 3%, Shanghai 2%, etc. Markets frequently travel on policy expectations as well as cyclical momentum. Unless the Indian economy starts to quickly positively surprise cyclically, it is not obvious to me as to why in the near future, the Indian market is going to feature relative to some of the very exciting things going on in other parts world both developed and developing. That being said, the Indian market was strong last year. So the underlying earnings outlook and strengthening the Indian dynamics mean that one should not get too negative.