When the reticent Indian prime minister Manmohan Singh finally spoke up, markets rallied. The leader, infamously labelled an “underachiever” by a popular magazine, proved his mettle through a series of recent progressive measures. These were reminiscent to the reforms he had undertaken earlier during his tenure as finance minister during liberalisation in 1991, when he lifted India out of a balance of payments crisis.
Over the past six months, the ruling multi-party coalition government in India had been plagued by “policy paralysis” as it favoured populist policies over reforms. However, fears of a potential downgrade of the country’s credit rating to junk status led the Indian government to announce more changes in under 24 hours than it had done previously in eight years.
The reforms included a cut in diesel subsidies, resumed asset sales, reduced taxes on overseas borrowings and plans to raise $2.3bn (€1.7bn) by privatising four state-run firms. Also announced was the opening up of investment of up to 49 per cent by foreign carriers in local airlines. But perhaps the most controversial proved to be allowing investment of up to 51 per cent by foreign investors in India’s $505bn multi-brand retail sector, a move that led to widespread protests by small shopkeepers and withdrawal of support of a coalition partner that would lose the ruling Congress Party its majority.
However, the government’s resolve not to roll back its reforms, as earlier, is restoring investment sentiment in India. As a result, Julius Baer, which had a long-standing underweight recommendation on Indian equities in its Asian and global emerging markets portfolios due to lack of movement in economic reforms has upgraded its stance to neutral.
“Recent news on the plans to open up the retail sector is very significant,” says Stefan Hofer, emerging market equity strategist at Julius Baer. “It is still early days in the reform process, but the signalling impact is very significant and we detect that investor sentiment vis-à-vis India has shifted to the positive.”
Valuations in India are as not as compelling as elsewhere in emerging markets and Asia, he believes. The bank predicts India to continue to show moderate growth, which will not change in the short-term, with or without retail sector reforms.
“Nevertheless, the recent reforms have put Indian equities back into a much more positive light,” Mr Hofer admits.
The policy changes are finding favour, particularly with those companies that are engaged in local logistics, explains Robert Aspin, senior investment strategist of the wealth management group at Standard Chartered, which is overweight equities and neutral on Indian equities. “Valuations are attractive and policy changes are encouraging. We see some excellent stockpicking opportunities in the market,” he says.
The reforms herald a big change from the relatively slow policy reforms over the past two years, feels Tushar Poddar, a Mumbai-based economist at Goldman Sachs. “While there will be opposition to the reforms and implementation issues, they are a big step forward and will be positive for investor sentiment,” he says.
Nevertheless, although the reforms signal a move away from the policy paralysis of the past two years, the immediate benefits may not be forthcoming, believes Manish Bhatia, fund manager of Indian equities at Schroder Investment Management.
“The cut in diesel subsidy will only reduce the deficit by around 0.1 per cent of GDP,” he explains. “With August inflation coming in above expectations at 7.55 per cent year-on-year, the diesel hike looks set to feed into inflation figures later this year and will only exacerbate another headache for Indian policymakers.”
The fund manager says he is looking for policy action on major bottlenecks that continue to receive little attention. “Land acquisition and labour laws, as well as the power sector, all require major overhauls,” Mr Bhatia says. “If these issues are addressed, we believe the investment cycle can be revived and inflows will start to pick up.”
Though the reforms are sparking interest, he feels foreign direct investment will not pick up substantially as Indian airlines are deep in debt and haemorrhaging money. Also, the fact that foreign supermarkets looking to enter the country as a majority stakeholder will have to go through individual states to set up operations, will be a major hurdle, he says.
Nevertheless, Deepak Lalwani, director of Lalcap, a London-based investment consultancy specialising in India, disagrees that it will pose any challenge. “Most of the states which are opposed to foreign direct investment in retail, such as West Bengal and Bihar, are poorer states, where companies will not have a market anyway,” he says.
“Broadly, these are big-bang reforms, which could be a game-changer,” Mr Lalwani says. “In less than 24 hours, the Indian government has announced more measures to liberalise the economy than it had done in the last eight years.”
