Market Keeps Dancing To Reform Hopes

The BSE Sensex rose for a fifth consecutive session to a three-week closing high on 11 September on rising hopes for fiscal reforms after Oil Minister S. Jaipal Reddy said India will have to hike the price of heavily subsidised fuels such as diesel in the near term (Read: [email protected] High). The finance ministry also assured India Inc that it will soon come out with steps to contain fiscal deficit and promote investment as well as growth which has dipped to a nine-year low of 6.5 per cent in 2011-12.

State-owned oil marketing companies such as Hindustan Petroleum Corp were among the day's leading gainers, while financial firms such as ICICI Bank also advanced on hopes fiscal reforms would spur the central bank to cut interest rates. (Read: Fuel Price Rise Can't Be Avoided)

Despite being disappointed in the past, investors remain hopeful the government will soon announce fiscal reforms given India is under threat of being downgraded into a sub-investment grade ratings by Standard & Poor's and Fitch Ratings.

Deutsche Bank analysts point out that in a scenario of continuing global risk appetite (from central bank easing) but without a corresponding sharp rise in energy prices, India's attractiveness in relative terms within the emerging markets universe – despite its internal issues - should improve considerably.  For every 10 per cent decline in global crude prices, India’s fiscal deficit would decline by 0.28 per cent of GDP while India’s current account deficit would ease by 0.16 per cent of GDP. 

Expressing concern over fiscal deficit, President Pranab Mukherjee has said if subsidies are not contained below 2 per cent of the GDP, it may pose a serious problem for the economy. And it matters what Mukherjee thinks as till recently he was the finance minister of India. (Read: Prez For Cutting Subsidies)

The recent commentary from the finance ministry (GAAR deferral, appointment of Kelkar Committee on fiscal consolidation) has been constructive and has galvanized hope that the government of India is keen to reinforce the confidence of both corporates and institutional investors and avert the risk of a sovereign rating downgrade.

Department of Economic Affairs Secretary Arvind Mayaram also said finance minister P Chidambaram will meet heads of public sector undertakings tomorrow to encourage them to move ahead with their investment plans.

As regards the fiscal deficit, Mayaram, in his address to the executive committee members of industry chamber Ficci, said the government "intends to take steps to correct the fiscal deficit, it will not happen in one day. Correction of fiscal deficit would also mean hardship and that hardship will have to be across the board".

Recalling the earlier statement of Chidambaram, he said, the decisions "not only impact those who are in the middle class or lower middle class but it will also possibly impact those who are in the higher classes ... I think we need to be prepared for that".

On steps to boost growth, Mayaram said Finance Minister will take up the issue of clearance of pending projects with the Cabinet. Several large projects involving investments of Rs 1.5 lakh crore are being held up because of delay in statutory clearances.

The minister, he said, will also take up the issue of investment by nine bluechip PSUs which are sitting on a cash pile of around Rs 1.8 lakh crore.

"We must also be a nation which recognises its own strength and to me growing at 6.5 per cent, which is amongst the highest in the world as of today or even 6 per cent should be a cause for at least some confidence in ourselves," Mayaram said.