The question remains though; how far will these go to improving investor sentiment?
We feel that although these reforms signal a move away from the policy paralysis of the past two years, immediate benefits may not be forthcoming. The cut in the diesel subsidy will only reduce the deficit by around 0.1% of GDP. With August inflation coming in above expectation at 7.55% y-o-y, the diesel hike looks set to feed into inflation figures later this year and will only exacerbate another headache for Indian policymakers. Meanwhile, foreign supermarkets looking to enter the country as a majority stakeholder will have to go through individual states to set up operations. Indian airlines are deep in debt and haemorrhaging money. It’s our belief that FDI flows won’t pick up substantially on the back of these reforms.
We are still looking for policy action on major bottlenecks that continue to receive little attention. Land acquisition and labour laws, as well as the power sector, all require major overhauls. If these issues are addressed we believe the investment cycle can be revived and inflows will start to pick up. These reforms are an encouraging start but we will be watching closely for further action from the government.