If UPA-II fails to kickstart reforms, markets are in for a prolonged bear phase.
Research houses are in a rather philosophical mood these days. One report by a domestic research house likens India’s stop-start reform process to Miles Davis’ jazz-rock masterpiece ‘Pharaoh Dance.’ In one of its reports, Enam Securities says: “The government then (in 2009) announced its 100-day agenda and proposed 14 legislative bills. Two years hence, only one of these, i.e. the Right to Education, has been passed, and a few have lapsed.”
With the conclusion of the state elections and a hike in petrol prices, all eyes are on the central government, in the hope that the UPA in its second edition will attempt to pass key bills that have the potential to kick-start the economy. Stock market strategists and economists believe the election results are a clear message to the Congress — perform or perish. With only three years left for the next general elections, the market believes the next 18 months are critical for the government from a reforms point of view.
Strategists believe the government needs to work to a plan, so that the rollout of a Goods and Services Tax, deadline for which has been extended to April 2012, happens. There is no clarity on liberalising sectors like retail, insurance and banking. Even as the government deregulated the prices of petrol, there is no clarity on decontrol of kerosene and diesel. What has really bothered the market is the lack of clarity on sharing of subsidies. This will impact the government’s Rs 40,000 crore divestment plan, too. The Street hopes the empowered group of ministers will take a decision on diesel price rises soon and freeze subsidy shares for FY12. Much is expected from the government, as far as the tabling of key bills is concerned. India currently enjoys a 37 per cent premium to other emerging markets. If the government does not seize the opportunity, “this premium is under threat”. Currently, interest in the capex portion of India’s market capitalisation (infrastructure, banking and engineering) is low. If reforms are introduced, then the interest in these sectors would revive.
However, as a fallout of corruption scandals in India (namely 2G scam), bureaucratic inaction may continue on issuing new projects. CLSA’s report titled Greed and Fear says: “There is a lot more noise in India than in November on the occasion of CLSA’s 13th India Forum and prior to the stock market sell-off. That noise consists of continuing inflationary pressures and worries about a sharp slowdown in infrastructure investment as a consequence of higher interest rates and the fallout from corruption scandals, most importantly the Rs 176,000 crore scam over the sales of 2G telecom licenses. The points are related in the sense that the worry is that bureaucrats, worried about a corruption purge, may simply stop signing approvals for new projects if they cannot receive the usual payment for signing off on them.”
Not only has the new project flow fallen, but also the value of new projects is down. This has become a major issue for foreign brokerages and research houses, as infrastructure is a major lever of economic growth. India loses two percentage points of growth each year due to infrastructure bottlenecks. The question is whether or not UPA-II wakes up and smells the coffee.