Significant Economic Policy Announcements in India

September 21st, 2012, Friday


The week has been eventful, with major policy initiatives announced by the Indian Government headed by Prime Minister Dr. Manmohan Singh to promote growth and bring the Indian economy back to above 8% growth level. The NSE Nifty rallied by 4.1% over the week, while the currency strengthened by 1.6%.   Some of the major announcements were:-

  1. Diesel Fuel and cooking gas prices were raised. This helps reduce the subsidy burden of the government and reduces fiscal deficit. This is a major political reform, as it eases pressure on both interest rates and the currency.
  2. Opening up the retail sector for foreign participation.  This allows global retailers to set up front end retail stores in India. This measure is expected to increase supply chain efficiencies and help modernize the retail trade.
  3. Increasing foreign ownership limit in airlines to 49%. This allows foreign airlines to set up base in India and will encourage modernization and consolidation.
  4. Increasing foreign ownership in cable and satellite businesses to 74%. This will encourage global media players to come into India and speed up digitization.
  5. Withholding tax reduction: Withholding tax on interest income received by foreigners has been reduced from 20% to 5% for Indian companies raising debt finance. This will encourage long term financing of infrastructure projects.

During the last few quarters, the Indian economy has experienced a slowdown due to the global economic crisis and tight monetary policy by the RBI. The government has finally shown political will and unfurled a host of reforms that will help the economy re-accelerate. This coupled with the recent reserve ratio cut by the Central Bank has the power to step up growth significantly.   We expect the new found political determination to continue to dominate government policies and this will have positive implications for the ruling party in the 2014 elections. We expect Indian equities to strengthen from here and the next 18 months to have far reaching positive implications for the Indian economy. This week has been really positive, with Indian infrastructure and financials as the main beneficiaries. Our portfolio is significantly overweight India.

 

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