Three Cheers for Government

The Government of India finally woke from its inertia and unleashed a slew of reforms to support a flagging economy. Better late than never seems to be the mantra of the Government. While there was expectation that a minor hike in diesel price is on the anvil, Rs 5 hike coupled with capping of subsidized LPG cylinder was a brave decision. And to follow it up with divestment drive and liberalization of FDI regulations in sectors such as multi brand retail, aviation, broadcast services and power exchanges, and one gets a perfect recipe to give a boost to investor’s sentiments.

Key Measures

Ø  Indian government announced a Rs 5 hike in subsidized diesel prices. Expected reduction in fiscal deficit to the extent of Rs 15,000 crore is expected by this alone

Ø  Number of subsidized LPG cylinder was also capped to a maximum of 6 per household.  This is expected to reduce fiscal deficit by a further Rs 5000 crore.

Ø  The Government also liberalized foreign direct investment (FDI) regulations in sectors such as aviation, broadcast services, power exchanges and multi-brand retail.

Ø  The Government's also decided to sell the stake in the National Aluminium Company, Oil India Ltd, Metals and Minerals Trading Company and Hindustan Copper Ltd in a bid to fulfill half of its budgetary goal of generating Rs 30,000 crore via divestment.

Outlook

The Government gave markets more than what it expected within a span of 24 hours when it unleashed a flurry of reforms to counter various economic problems such as rising fiscal deficit, dampening investor sentiments, FDI bottlenecks etc. However, at the same time its implementation will be closely monitored in the wake of stiff opposition from NDA and own allies such as TMC. A Government which has been accused of policy paralysis seems to have finally gotten its act together amid chaotic parliament sessions and constant accusation of scams. In the words of Prime Minister Mr Manmohan Singh ‘Time for big bang reforms is here and if they have to go down they would rather go down fighting’ . While it remains to be seen whether the implementation of the measures are done as envisaged, the signs are that Government may just stick to its gun this time around in order to bring the economy back on track. And for this, Mr PM, you deserve a bow!  For all we know we may well see a new Times Magazine cover with your photo and the caption ‘Rising from Ashes’ to signify the positive impact that you have had on Indian economy, not just once though.

We believe that portfolios would start to shift from defensives low beta (IT, Pharma, FMCG) to aggressive high beta (Banks, Infra, midcaps). In spite of all the pessimism Sensex is at 14 month high climbing every wall of worry. It seems that worst is over for India and the new dawn has just set in.

By Rajat Gupta