Oct 2014:Government gets moving on reforms

After a correction in the early part of October, the Indian market bounced back sharply and closed the month at record highs. The most concurrent reliable economic data available in India is the monthly automobile sales – the trend in recent months has been encouraging. While the 4 wheeler passenger vehicle sales started turning positive around June, the medium and heavy commercial vehicle sales, which is the most cyclical of all the automobile segments, saw the first positive tick in September. HDFC Bank also suggested in its conference call that they are seeing some signs of economic recovery.

The government also seems to have set the ball rolling on the policy front. One major step taken recently was to de-regulate the price of diesel. While the previous government had done its bit by raising diesel prices gradually over time, the announced deregulation is an important step because the diesel subsidy was a major contributor to the oil pool deficit, which in turn had a big impact on the fiscal deficit of the government. At its peak, the oil pool deficit was more than Rs 100,000 crore and was a big burden on government finances. The money saved due to deregulation of diesel can be better utilized to build out infrastructure in the country.

Along with this major policy change, there have many other small policy steps taken. LPG subsidy would now be directly given to beneficiaries into their bank account. The price of natural gas has been hiked from $4.2 per mmbtu to $5.6 per mmbtu which will incentivize more exploration. The labour policy has been tweaked to reduce inspector raj. FDI in the construction industry has been eased. All in all, the majority that the government enjoys in Parliament is beginning to translate into big and small steps towards economic reform.

What has further helped India’s attractiveness as an investment destination is the falling price of oil internationally. One of the major causes for the fall in oil is that over the last 5 years US’ oil production is up almost 50% and concomitantly the global demand for oil remains weak because large parts of the globe are still struggling with economic growth. India imports more than 70% of its oil requirement and is a major beneficiary from the fall in price of oil.

Over the last few months we have seen inflation in India cool off substantially and the falling price of oil has added further impetus to that. Along with the cut in the fiscal deficit due to diesel regulation, this should strengthen the hand of the RBI to cut interest rates going forward. To elaborate, a reduction in the fiscal deficit reduces the government borrowings from the market and thus has a positive impact on interest rates in general.

All in all, while last year same time, there was complete gloom everywhere, sentiment has picked up in the last few months and the signs are encouraging. Valuations which were very cheap a year back are no longer as cheap and we would best describe them as fair and some of our high conviction large cap ideas are still reasonably priced.