TIME TO BE CAUTIOUS WITH PERSONAL FINANCIAL INVESTMENTS

The overseas investors turned bearish in April 2012 and pulled out Rs 777 crore, according to the data available with the market regulator SEBI, attributed to a host of factors, including the government's anti-tax avoidance rule (GAAR) proposal announced in the Union Budget and S&P lowering India's credit outlook to negative from stable.

The negative outlook is a consequence of India’s penchant for populism laced vote bank politics as well as extraneous factors which are out of its control. India’s government finances have failed to improve despite high economic growth in the past decade due to unrestrained non-revenue expenditures, small tax net, increased subsidies, unfavorable inflationary pressures due to supply side constraints, Credit & European economic crisis to name a few. These factors have led to deterioration of India’s macroeconomic factors viz., widening of fiscal deficit, moderation of economic growth, slackening in investments, dwindling foreign exchange reserves, and sustained devaluation of Indian currency. These coupled with the governments’ inaction or economic policy paralysis due to coalition politics, RBI’s fiscal policy of high interest rates to tame inflation, Infrastructure issues, persisting inflationary pressures due to supply side constraints and governments’ inability to tackle the commodities supply side constraints have been dampening investment climate and foreign fund inflows.

Undeniably, the Indian economic scenario does not give a feel good factor either for an investor or for an Indian citizen, unless, India returns to a robust growth, healthy government finances and low inflationary environment. It is imperative for Indian policy makers to persistently pursue policy efforts to shrink long term governments’ expenditure; reduce subsidies and expand the tax net to make it more inclusive; address the Infrastructure and commodity supply side issues; and give impetus to the GDP growth.

Deutsche Bank along other global business houses recommend getting more defensive on Indian stocks until investors see more certainty on economic indicators and policy, a more stable rupee and improvements in corporate confidence. Given the uncertain economic scenario ahead for the country as well as the other regions, pecuniary awareness and prudence are keys to personal financial investments.