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After a brief pause, the government has rolled out some long pending reform measures over the past few days. While the focus on rejigging the bureaucracy continued to receive priority, the government has implemented policy decisions in the more difficult areas of labour and energy sector.
Besides decontrolling diesel, LPG subsidy has been essentially capped with a major push to the Direct Benefit Transfer (DBT) rollout. Gas price hike, too, has been finally effected after two rounds of deferment aimed at improving domestic availability of gas supply.
Besides the reform measures, the outcome of state polls – Maharashtra and Haryana – over the weekend has seen the benchmark indices – the S&P BSE Sensex and the CNX nifty – gain nearly 1.5% in intra-day deals.
Here’s how analysts interpret these developments:
Impact on economy
Government decision making has picked up. Last week, the government appointed Arvind Subramanian as the Chief Economic Adviser. Sudden resolution of a number of pending decisions suggests that the government was on a pause mode due to the impending state elections. We remain positive on India's economic outlook and believe that the economy is headed in to a Goldilocks period of higher growth and lower inflation in 2015. The fuel reforms are a very important signal of the government's commitment to tough economic reforms. They will encourage more competition and investment in the oil and gas sector, which is a long-term positive. -- Sonal Varma, an economist at Nomura
Impact on companies
Diesel de-regulation a big positive for oil PSU’s as it significantly reduces under recoveries and gives pricing freedom that could help to improve marketing margins (currently 60% below global averages). Re-launch of LPG DBT scheme shows government commitment towards reforms and intention to fix per cylinder subsidy will help to further cut subsidy. We continue to remain positive on the ongoing oil sector reforms and maintain buy on ONGC / OINL (OIL India Limited) and OMC’s (HPCL, BPCL and IOCL) while maintain neutral on RIL (Reliance Industries) as large non-core investments even if accretive over long-term; gains will be back-ended, diluting overall return ratio in the interim. -- Dipankar Mitra, Motilal Oswal Research
Stock strategy
The combination of policy announcements and state election results coupled with resumption of global risk appetite on the back of a change in the market’s perception of the timeline for Fed policy normalisation is likely to lead India to outperform its EM peers. Buy banks on falling inflation, expeditious policy measures and improving market perception on positive S&P action. Stocks to Buy: State Bank of India, Punjab National Bank, Bank of Baroda, LIC Housing Finance, Shriram Transport Finance, Axis Bank, Yes Bank. Also, Buy downstream oil refiners (HPCL & BPCL) on expectations of diesel marketing margin expansion. -- Abhay Laijawala, managing director and head of research at Deutsche Equities India
Inflation, interest rates
Late last week, the Modi administration unveiled a further liberalisation of diesel prices. That should offer fiscal savings over time that can be used for more productive uses, such as public investment. The beauty is that, with the current drop in crude prices, there will be no immediate sticker shock to consumers. Meanwhile, the fall in crude prices also provides support for India's trade balance. Does this mean the RBI can start to cut rates? We still don't think so. Yes, the inflation trajectory looks a lot better. But the central bank's inflation target is not yet secure. Risks remain. Fundamentally, the growth-inflation trade-off is still challenging. Supply-side reforms need to be rolled out to allow India to grow faster without reigniting price pressures. To be sure, the Modi administration's announcement last week of some labour market reforms is pointing in the right direction. But more needs to be done on this and other fronts. -- Frederic Neumann and Prithviraj Srinivas, HSBC
