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    Expect breathtaking recovery throughout 2021 with over 13% growth

    Synopsis

    The Street is arguing that growth would be only 8-9 per cent, but there is scope for outperformance.

    Maneesh Dangi-1200ETMarkets.com
    There is going to be a "breathtaking recovery throughout 2021" with a growth rate of 13-plus per cent, and there is scope for outperformance, says Maneesh Dangi, CIO-Fixed Income, ABSL AMC.

    Each time we have interacted in 2020, you have been making a case that one should not be outrightly bearish and that call has worked like a charm. What is your view on the economy and demand?
    The template remains the same. Once we understand what happened in the pandemics of 1918 or 1958, you realise that most of these events invariably do not leave much scarring in the economy, which is why back in April-May also, I argued why we would have a V-shaped recovery. In a sense, it is empirical. It has happened many times over and over again, but we do not seem to learn these lessons, which is perhaps why there are opportunities available in the market every time such events occur.

    Now what would be the way forward for 2021? We are going to see a breathtaking recovery throughout 2021, and our assessment is that our growth will be 13-plus per cent, and there is scope for outperformance. The Street is broadly getting it wrong, arguing that it would be only 8-9 per cent. That is what the Bloomberg estimates suggest for Street economists. It is mostly going to be driven by capacity utilisation returning to the levels seen in 2019-2020.

    The labour market, which was demobilised to a certain extent, is back. We have argued about this many times and as long as there is no great scarring on consumers, and no altered behaviour of consumers, we will chug along and see a very sharp recovery. The bigger question is what happens the year after. Most policymakers would also be worried that if such a sharp growth returns, it would mean some inflation is returning to our economy or the world economy. The kind of fiscal and monetary stimulus that has given us this sharp reversal of pandemic times could also potentially mean aggregate demand can turn red hot, and return in terms of inflation.

    I do not think inflation is going to come back in a meaningful fashion. You will still continue to have slack in the labour markets to a certain extent throughout 2022 and 2023, and that would keep a lid on inflation.

    US bond yields are up 20 bps in the last 10 days. Inflation has made a comeback. Food inflation is way above the RBI's comfort zone. Is that not the single biggest risk?
    The space for capital gains is pretty much over. It is very unlikely that the interest rates will back in a meaningful fashion because of a lot of plumbing we still have to do in terms of ensuring.

    While the economy would recover, I presume the monetary and fiscal policies would remain supportive and for that, this financial repression would continue. In summary, the big picture for bonds is that they are moving sideways, and perhaps would begin to deliver positive real returns in the next one year. But that is largely because inflation would start to dwindle. Having said that, people have to accept that over the next 10 years, if one were to invest in India, government bonds are yielding 6 per cent and good "AAA" bonds 6.50-6.60 per cent. I would not be surprised if India’s inflation is somewhere between 4-4.5 per cent, or even 5 per cent in the worst case scenario. That still is a 100-150 bps, perhaps 200 bps, real spread on inflation. So unlike what you are seeing in OECD countries, in the US, there is return on Treasury.

    If you invest there in "AAA" bonds and the treasuries, the real returns in those territories are sharply negative. In the US, breakeven inflation is 2 per cent and the Treasury is at 1 per cent, which means if you invest in a 10-year Treasury, you will get a negative 1 per cent return over the next 10 years. In contrast, in India, you would earn 1.5 per cent real return, or 1 per cent, 1.5 per cent or even 2 per cent, if we are able to achieve 4 per cent inflation over the next 10 years.

    So in some sense, India is one of those few places where the real returns are likely to be very high, and that also explains why a lot of FII money is actually beginning to chase emerging market assets. Out there in the US, Germany and many other places, the returns for treasuries are sharply negative in real terms. While it is true that the nominal returns in India in fixed income are low, we would deliver far better positive returns than the majority of developed markets.

    In a sense, the consumer has been bitten by the COVID crisis directly or indirectly. How do you see that changing?
    I am not a big fan of aggregate demand theorists. India’s per capita is so low that in everything from ACs to housing to clothes to footwear, our consumption is far lesser than even the emerging markets that we like to compare ourselves with. I am not far too worried about the return of demand. India’s Achilles heel has always been its supply side and good news, of course, right now is that the government’s design thinking today is remarkably different from anything I have ever seen.

    Design thinking is the supply-side thinking that lets us build in India because to get people to consume is far easier in India but to build a supply chain is very difficult. Can I build my ACs, TVs, mobile phones and everything that I consume exactly the way I have built my auto, cement and steel?

    That is a big problem to crack in India. But on the demand side in 2021, many economists have argued that this is pent-up demand and it would wither away. But if we track the December numbers, we see that we are tracking even more and faster recovery than November. So, a) I do not think that what you saw during the 42 days of the festive season was pent-up demand. I think this demand is natural. It is here to stay and would perhaps start to dial up further as we move into 2021, which is why we put out our growth targets at 13-14 per cent for FY22.

    The chief anchor of demand in India, incrementally, is housing. Given the higher level of affordability, very low levels of real interest rates and interest rates, access to mortgage loans and subsidised loans for affordable housing make it very attractive for people to go and buy houses. Every time you buy a house, there are a million things you do; you buy your curtains, furniture and 20 other things.

    The chief anchor of India’s demand recovery not just in 2021 but for the next many, many years is going to be housing, and, I think, the stage is set for a very sharp recovery in housing. Unlike China and the US, and perhaps even Europe, India has had a bust in the housing market over the last 5-6 years.

    Our real estate prices have actually gone nowhere and the income levels have risen. So the affordability is very, very high. It is not just in charts but in reality if you go and buy a house today, it is very high especially in the tier II and tier III towns.

    My sense is that housing is the one which would weave India’s great demand recovery and the growth recovery over the next many years. Today, the conditions are fairly benevolent to promote good housing growth.
    ( Originally published on Jan 12, 2021 )
    The Economic Times

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