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Hemant Mishra/Mint
Hemant Mishra/Mint

A long economic wish list for the government this year

Any disappointment from the budget could trigger a steep correction in the markets

Much is expected to happen this year. The key themes that are likely to play would be 1) Constructive policy intervention by government (reforms), 2) Operating leverage (increase in capacity utilization) across various sectors, and 3) Domestic consumption and exports.

When the current government came into power there was lot of hope and expectation that it will restart the reforms process especially in terms of fast decision making, speedy clearances, more transparency in allocation of natural resources, passage of many pending Bills in Parliament, fiscal reforms such as capping of subsidies, and passage of Goods and Services Tax and Direct Taxes Code Bills. However, only some catalytic reforms but no radical action has been seen. Despite a clear majority in the lower house of Parliament, the government has been unable to manage the opposition resulting in no major Bill getting passed. To circumvent the established procedure the government has followed an aggressive ordinance route. While this may score political points for the government, it will not instill confidence among big investors, and, therefore, may not yield the desired result. It is hoped that the government will find some way to get over this problem and will take concrete steps on much awaited reforms.

Operating leverage is actually a continuation from the previous year. It was expected that the new government would be able to quickly resolve issues related to execution as compared to the previous government, so that the demand in the economy will revive, leading to better utilization of capacities. While this has not happened yet, due to business confidence improving substantially and overall macroeconomic conditions getting stabilized, growth may revive if hurdles to growth are removed.

Whenever the sentiment is bullish and business confidence is high, domestic consumption picks up. When corporate confidence in growth improves, wages go up leading to more disposable income at the hands of common people. With inflation expectations managed well and international commodity prices coming off sharply, all ingredients for strong revival in domestic consumption seem to be in place. The services sector, which provides employment to a large workforce, is largely dependent on the US and other developed markets. Since those economies are on the path of strong recovery, the future of this sector also seems to be good. The domestic demand for daily consumables, lifestyle products, and others is likely to accelerate and remain strong for many years in India. The urban population will be better placed now as compared to their rural counterparts as they were impacted more severely by inflation in the past several years.

Current government’s flagship programme, “Make in India", is likely to provide a big fillip to our external sector. While export-oriented sectors such as information technology, and pharmaceuticals remain preferred sectors to invest in, many more like auto parts, home appliances, electronics manufacturing can become attractive.

The market is keenly waiting for Union Budget 2015 to be presented in February 2015. Many participants believe the budget could be a make or break event as this would be first full budget from the current political dispensation. This budget is likely to clearly enunciate policy action on its already pronounced development agenda. Sceptics will be looking for clues on announcements to be converted into actionable and financial commitments made to such an agenda. Fiscal discipline, policies to stimulate growth in the economy, steps to revive capex cycle, resolution of tax disputes with companies, big ticket reforms are key points under the scrutiny of all investors. Although the budget is not the only event where all the policies have to be enumerated, it is just one of many avenues for the government to manifest its economic agenda. This time it has achieved even more significance since in the past seven months of the present government’s tenure, many promises have been made, and expectations raised but not followed by actual action. Long-term investors are waiting on the fringes, hoping to get clarity on issues related to taxation (especially retrospective), GAAR, FDI in various sectors and more. Any disappointment from the budget could trigger steep correction in the markets.

Edited excerpts from Year of tussle between bulls n bears, by IndiaNivesh Securities Pvt. Ltd.

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