Dr. Singh, It’s Time You Expedite Reforms

Pranab Mukherjee has been sworn in as the 13th President of India. All eyes are now turned toward the Prime Minister, Dr Manmohan Singh, expecting him to push through reforms at a faster speed to bolster investor confidence. This is in line with what he had announced at the time of taking over the Finance portfolio, as being necessary to revive the “animal spirit”. There is no excuse for not going ahead with necessary reforms at least now, when the state elections are at least five to six months away. The Prime Minister has to take bold decisions at a faster clip, ignoring opposition from the UPA’s allies to do whatever needs to be done to put the economy back on the growth path.

Although the overall economic picture including that emerging from the Euro zone is not very encouraging, yet FIIs have pumped a little over Rs 6000 crore between April and June 2012. They have done so on hopes that the Indian government will bring into force some market-friendly policy measures and reforms. These include reducing the subsidy on diesel and resolving the issue of coal supply on a priority basis so as to improve the conditions of power producers and suppliers, power being the main concern for manufacturing units.

Other issues that require quick attention are providing a clear, time-bound roadmap for the implementation of important acts such as GST and DTC. It would also be better to devise a clear plan to keep fiscal deficit in control and to make a sincere attempt through various initiatives to attract FDI into the country. Some of this is under implementation, with Pranab Mukherjee already having signed the compensation papers for GST a day before he resigned. However, there is a lot that is pending before the government and the Union Cabinet is expected to approve several pieces of legislation in the near future that can be introduced in the Monsoon session of the Parliament which begins on August 8. These probably include the Pension Reform Bill, Food Security Bill and the Lokpal Bill. But this is not enough.

The Prime Minister is an astute and experienced politician who is fully aware of the challenges facing the economy. The next couple of months will be very crucial. After more than 30 years in public office, Dr Singh’s legacy may well be determined by his remaining time in office. If he treads in the manner he has done since the 2009 elections, he will quickly become a lame duck in less than year after the 2014 elections.

The government has projected a deficit of around 5.1 per cent of GDP for fiscal year 2012-13, but this relies on rosy assumptions such as GDP growth at 7.6 per cent. Using more realistic figures, the deficit would end up closer to six per cent of the GDP, which is uncomfortably high. The most effective course for Dr Singh involves scaling back subsidies for fuel, especially diesel. There will no doubt be a backlash, both within the Lok Sabha and among voters, but such a move is in the long-term interest of the economy.

All of the above looks difficult for Dr Singh to do, but is certainly not impossible. In a best case scenario, Dr Singh could begin with small changes such as a reduction in fuel tax subsidies, which would not need Parliamentary approval to generate momentum and raise expectations for reforms. In addition to this, if the RBI slashes its Repo rate by 50 to 100 basis points, this could turn around business confidence and investor sentiment, help to fund the current account deficit and support the rupee. If he can bring in the optimism that existed around the Indian economy as recently as 18 months ago, it could become self fulfilling, and in turn would help to boost investment opportunities and economic growth. We would like to wait and watch for the “animal spirit” that Dr Singh has spoken of.

Presently, the market is in a very weak condition, and the prices of some of the Sensex and ‘A’ group stocks are very attractive for investment, with a number of them trading at their 52-weeks lows. Our cover story in this issue recommends five stocks for big investors (read: HNIs). We have also put forth our views on other asset classes that form a part of HNI portfolios.