Strategy: External factors and reforms:: Kotak Sec, report link

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
External factors and reforms. We look at issues that may derail India’s investment
case in 2015. (1) Socials events may affect the Indian government’s ability to implement
legislative reforms. (2) Increase in global crude oil prices and US interest rates may erode
India’s recent macroeconomic gains. The government’s urgency to implement reforms
through ordinances is welcome but it is not a permanent solution. It may have to move
smarter and swifter to avoid being caught by external events and factors.

Unwanted social issues may affect the government’s ability to implement certain reforms
The government’s ability to implement difficult economic reforms is constrained by its minority
position in the upper house of parliament and its limited influence over states. Social events
over which the government has little control may divert its attention and also unite opposition
political parties. The recent winter session of parliament was productive (see Exhibit 1 for bills
passed) until certain social events stalled the proceedings leading to certain important economic
bills being stuck.
Supportive global factors for now but can change quickly; CAD/BoP gains largely done
(1) Global crude prices and liquidity have been benign leading to a sharp improvement in India’s
macroeconomic parameters (see Exhibit 2). Global crude supply-demand balance (see Exhibit 3)
looks favorable for India but prices may not fall further. Also, prices may rise if market forces,
voluntary supply cuts or involuntary disruptions affect supply. (2) The strong 3QCY14 GDP print
for the US economy and other favorable economic data (see Exhibit 4) may bring forward
higher interest rates in the US leading to lower gap between interest rates in India and the US;
we expect the RBI to cut policy rates in 1QCY15. FPI debt inflows, which have been very strong
FYTD (see Exhibit 5), may weaken and affect the recent gains in India’s BoP position.
Reforms on track but through ordinances; more permanent measures will be critical eventually
The government seems determined to implement economic reforms and has decided to issue or
re-issue ordinances to implement certain legislations that it could not implement through acts
of parliament. The ordinances will (1) increase the FDI limit in the insurance sector to 49% from
the current 26% and (2) permit the government to auction 101 coal mines and open the sector
for private-sector commercial mining. The recent victory of the BJP in the state election in
Jharkhand and its strong showing in Jammu and Kashmir election will embolden the
government to implement more reforms. The BJP and allies now control 10 out of 29 states but
their footprint covers a large part of India in terms of economic relevance (see Exhibit 6).
The election cycle for the Rajya Sabha will not result in the BJP gaining control over it until early
2018 (see Exhibit 7) even assuming it wins all or most of the forthcoming state elections.
More reforms critical; cooperative development important
The government may want to engage with other political parties and opposition-ruled states in
order to ‘sell’ its economic vision. The broad political consensus on implementation of GST is a
good example of cooperative development. We expect several executive reforms to be
implemented over the next few months while legislative reforms may take more time (see
Exhibit 8 for likely reforms over the next 1-2 years). The government should continue with
deregulation of fuel prices (LPG) and enter into forward contracts for purchase of crude for its
special reserves (5 mn tons underground cavern storage capacity is nearing completion) and
encourage the government-owned refiners to enter into forward contract for crude (‘lock in’
the current crude price, in other words).
Strategy
Portfolio
E

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily29122014ap.pdf