Uncertainties continue to grip investors at the start of 2016. Speaking to Bloomberg TV India, UBS’ Head of India Research Gautam Chhaochharia cautions that earnings forecast may be cut again in FY17.

How are you viewing 2016 for the economy, earnings and the markets?

We are still sticking to the same macro framework of disinflationary process continuing, growth recovery being slow and below-trend GDP, which also means that earnings cuts will continue. While 2015 was a record year for earnings cuts, with almost 15 per cent cuts, we are still expecting top down around 8 per cent cuts in earnings for FY17. This will still constrain any re-rating of the market and be an overhang in the near term. So, our Nifty target remains 8,200 for December 2016. It does mean lacklustre returns for the market. What can possibly change that view? What should happen as far as the macro environment is concerned that can possibly lead to upgrading your target?

In the short term, this is one of the things to watch out for this year and it could be a big event for India in the near-term and medium-term perspective — as to what stance the government and policy makers take on the fiscal.

The government has been sticking to a fiscal consolidation roadmap. The RBI has been sticking to a reasonably tight monetary policy despite the rate cuts.

This basically means that they are looking for macro stability, creating a base for long-term growth and not too worried about short-term growth.

Now, there are already some hints in the recent mid-year economic review that the government and RBI should or could review the monetary or fiscal stance.

There is upcoming Pay Commission mandate, which can lead to higher spending by at least 1.5 percentage points of GDP for the government — Centre and States taken together.

So these things hint that there could be a change in the fiscal stance. If that happens it could provide some short-term boost and it could lead to short-term data points going up and markets going up.

But we would also caution investors that it will also mean a rise in macro stability risks around inflation, current account deficit and therefore currency.

One of the reasons why India did very well in 2015 in a relative sense compared to other emerging markets was because of India’s macro stability. By doing this change in fiscal policy, the government could hurt that perception about India. So it is a tough balancing act for the government.

It will become clear once we get the Budget out. That will determine the stance for the policy, the short-term market impulses as well as the medium-term implication for the economy.

Given that while government spending has been picking up, and you really haven’t seen the pickup coming in the investment cycle front, how much pressure do you feel it is putting right now on stock price action or earnings delivery? How much longer do you feel the story is going to take to play out given that they don’t see any other immediate triggers then?

Earnings recovery will happen. Just like GDP growth recovery, there will be some earnings recovery even this year as the negative impulse from sharply lower WPI, which matters for corporate earnings, dissipates and you have some sort of support in terms of pricing. While margin benefits may not be as much as last year, we will still see some kind of earnings.

But it will be mild and much lower than what the market is looking at. The government’s capex is needed right now but it itself does not drive the capex cycle. So just because the government is doubling spending on roads, it doesn’t mean India’s capex cycle revives.

It is a starting point and the hope is that over the medium term it kind of gets the private sector to invest over the medium term.

Can India still stand out in the EM basket and attract capital inflows?

Looks difficult. It won’t be an easy one to argue for. India is already an over-owned market and GEMs is still not in a position to attract flows.

If India somehow manages to become an asset class on its own, only then there is a case for it to attract flows.

A lot of petro dollars — the oil beneficiary countries, who were big investors in secondary markets globally including India — are unable to put in money or are withdrawing money.

Does it reverse this year? It doesn’t look like. The big hope for India can be FDI. We have already seen signs of that with Japan committing big investment and Prime Minister Narendra Modi making a pitch for Make in India.

Whether FDI flows can make up for FPI, it is a tough.

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