India reforms setting an upside for stocks

Over the weekend, India’s Prime Minister Narendra Modi lifted state controls and subsidies on diesel prices for the first time in a decade. This was part of a wider push to attract investments to the sector.

Indian Stock board
Source: Bloomberg

The move is expected to encourage private retailers to restart idle operations as market forces allow them a more level playing field.

With oil prices pushing four-year lows, the cutting of fuel subsidies was one low hanging fruit, which Modi was expected to take advantage of.

Investors have been watching this issue closely as a gauge of how committed his administration would be in keeping the reform promises.

Stock markets rallied ahead of Modi’s election win, gaining over 16% in the first half of this year on the prospects of many economic reforms, such as making the energy industry more efficient, particularly in the coal sector.

In the past month, investors had been dialling back their optimism, which saw stocks consolidating in September. There was some recognition by the market that it was still early days for any economic benefits for the corporate sector to trickle through.

However, with the latest decision on oil subsidies, we’re likely to see investors’ confidence return.

What India needs to power its economy and stock market further ahead is more progress in regards to its reform agenda.

Poor governance and inadequate infrastructure have long been blamed for India not fulfilling its maximum potential. Progress in these areas will help catalyse many sectors and improve the effectiveness of public expenditure.

The latest industrial production numbers added some urgency to this; August figures showed that output rose just 0.4% year-on-year, flat from the previous month and way below the market consensus of 2.6%.

We saw a step in the right direction with the labour reforms introduced earlier this month. Some may argue these were quite long overdue, India ranked in the bottom third on the World Bank's ranking of nations for ease of doing business. 

The streamlining of labour laws to make inspections more transparent will go some way to cutting red tape and corruption concerns. This makes it a more conducive investment environment and will help the ‘Make in India’ manufacturing campaign gain traction.

 

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