Marking Time in Bombay

How's the economy?

The government has projected GDP growth for [1996-97] of 7%. It's a fact that agricultural growth is much lower, but that's offset by a 12% industrial expansion. If the budget deficit is contained, there is no reason why a 7% growth rate would not be achieved. The liquidity situation has eased substantially, and it has become easier for firms to raise money. Therefore, I feel that corporate earnings for 1996-97 will be at least 20% higher, on the average, than they were in 1995-96. As for inflation, the new United Front government has projected a rate of 7% to 8%, against the figure of under 5% when it took power in early June. Inflation will certainly not be lower than that.

What about economic reform?

The reform process has been beneficial for the country, and you can see that wealth has been generated. Whatever reforms had been introduced by the previous Congress regime are being continued, but whether they are being continued at the same pace is the question. One must, however, take into account the shortage of infrastructure in the country, which is why the focus has switched to infrastructure in the recent budget. The United Front government is doing the best it can. You must appreciate that it is a 13-party coalition, which includes some parties that are opposed to deregulation on sheer principle.

What are the prospects for India's stock markets, which have been in the doldrums since June?

If you look at the times when the indices were high, and what they are today, the only major development that has taken place is the presentation of the national budget [in July]. Apart from the introduction of the minimum alternate tax and the proposal to allow non-voting shares, I don't think there has been any negative feature that could have gone against the stock markets. If the indices have gone down, and we are to attribute this only to the [lack of] interest of foreign institutional investors, then it would be difficult for the markets to move up. If we find that there is a little more depth in the market, then the position should be much better. On these two counts, it is hard to predict the levels at which the market will settle. But the [corporate] fundamentals are so strong that I'm quite hopeful the market will recover from its prolonged bearish phase.

Are foreign institutional investors leaving because of the new proposal to introduce non-voting shares?

No, I don't think so. From time to time, they review their portfolios, and if they think their exposure to India is too high, they think it is better to hold their hand. When the market settles at a lower level, they come in again.

The Unit Scheme-64, UTI's flagship fund, had a yield of just 8.69% for the year 1995-96, the lowest in UTI's history. What happened?

I admit that for investors who have come in only last year, the yield is low. But for people who have been with us for a longer period, the earnings have been much more than 8.69%. During the last one year, we had very heavy pressure on redemptions. Because of poor liquidity in the market, corporations resorted to selling our units.

What we could have done was liquidate equity holdings, and switch to debt instruments. Equities normally provide a lower yield but give better capital appreciation. In any case, we would ideally like to have less equity in the portfolio of Unit Scheme-64. In fact, we're currently trying to reposition it as a debt-oriented scheme, which is what it was originally. It is only lately, over the last four or five years, that the scheme's equity component had gone up.

What stocks do you like?

We have heavy weighting in textiles, iron and steel, finance and banking, petrochemicals and engineering. I also fancy automobile components, pharmaceuticals and software.

But there has been a steep fall in steel shares since customs duties on imports were lowered.

You must look to the fact that everybody is talking about infrastructure - that is the sector which is going to get a lot of focus. I see no reason why steel shares should go down further.