Investing in India - 5 Minute WrapUp by Equitymaster
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Keep an eye on these Megatrend triggers 

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In this issue:
» Land acquisition reform is on radar
» What will be the impact of diesel de-regulation on OMC's?
» Will inflation calm down soon?
» Do labour reforms improve employment quality?
» ...and more!


00:00
 
India, for long, has been perceived as a land of red tape. Bureaucratic hindrances more than camouflaged the fundamental strengths of the economy as a good investment destination. 134th rank in the Ease of Doing Business index is a testimony of India's achievement as a notoriously difficult place to do business. Hence we were not surprised when the new government's 'Make in India' campaign was also taken with a pinch of salt. However, it seems that there is some truth after all in the government's resolve to make India business friendly. Within 6 months of coming to power the government has unfolded a series of reforms. What gives us conviction about the government's intent is that the reforms are not namesake. In fact areas like land acquisition, labour laws, coal allocation, fuel deregulation have been untouchable areas for the previous government. However, most of these are now being tackled head on.

The recent decision to de-regulate diesel, increase natural gas price and auction the de-allocated coal blocks reflects that the new government is ready to bite the bullet. It also shows government's intent in aligning the fiscal imbalance. Divestment in PSUs, overhauling tax laws and dealing with politically sensitive issue of fertilizer subsidies is next on radar. Not to mention his administration's intent to scrap outdated laws. These laws were doing more harm than good and were used as a net to circumvent businesses.

All these measures will indirectly open the economy and increase the appeal of India to foreign investors. In short, these measures are key signals that Indian economy is in a Megatrend of sorts. The labour reforms, fuel pricing reforms, financial reforms etc are a must have to ensure that India companies make the most of the Megatrend.

We have shared with you in the past what Megatrends can do and have done to corporate profits. In fact such trends have been witnessed not just in India but also in countries like the US, Japan, Korea and China. But it is very important for investors to take the right cues and keep an eye on the key triggers of what we call the Golden Decade of Megatrend. The India Letter can certainly help you do this.

Will reformist approach of the Modi government create any Megatrend investing opportunities? Let us know your comments or share your views in the Equitymaster Club.

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02:25
 
Ever since it came to power, the new Government has lost no time in announcing one policy measure after another. Most of it, of course were to improve the perception of India not being too business friendly. Therefore, in came fuel price reforms and also few changes in labour rules. The Government has now set its sights on the all important land acquisition reforms. As per a leading daily, meetings have already happened around issues being faced while acquiring land for various projects. It should be noted that a brand new legislation around acquisition of land already came into being January 1 this year onwards. However, it has already run into hot water with industries accusing it of being too cumbersome. As a matter of fact, it received flak from even some of the congress run states. Consequently, efforts are on by the current Government to see whether some exemptions can indeed be carved out. According to us, no other matter is likely to test the Government's mettle as strongly as this one. And if it is able to thrash out a solution that's acceptable to all, we would have really taken a big step towards the ambitious 'Make in India' program.

02:55  Chart of the day
 
After years of policy paralysis and lack of reforms, the initiatives by the new government have been noteworthy. Among some reforms that the government announced recently, labour reforms is a key area. For a long time, India has been grappling with issues of antiquated labour laws. And this has been severely hampering the country's growth, particularly in the manufacturing sector. In this context, the focus on labour reforms is welcome. But it would be too early to raise the toast. Let's understand why.

Labour reforms by themselves do not mean anything. It is their effectiveness in creating quality jobs and improving productivity that really matters. An article in Livemint points to an interesting dichotomy. In a paper published in 2008, Sean Dougherty had developed an index that ranked Indian states according to the number of labour reforms that had been undertaken. In 2014, the Institute for Human Development created an index that ranked states according to the quality of employment that provided. Ideally, the states that ranked higher on the Dougherty index should have done well in this latter index as well, isn't it? But you will be surprised to know that the findings have been ironical. States that rank higher on the Dougherty index have, in fact, done poorly on the quality of employment front.

What this means is that labour reforms alone cannot solve labour and employment issues. Factors such as lack of education and skill development, predominance of the informal sector and difficult access to regular jobs are key problems that need to be address to make labour reforms effective.

Do labour reforms offer better quality employment?


03:30
 
Subsidy, particularly on fuel prices, has been an 'untouchable' area of reform for long. The previous government continued to dole out the subsidy for a decade without any economic justification. This even as the health of state owned oil marketers went from bad to worse. Readers would also remember that there was a time when the government's dues to oil companies were not even recorded on its books. Instead they were off balance sheet items! Departing from such fiscal profligacy, at least the new government is taking necessary steps to set India's fiscal balance right. The recent fuel reforms, though partial, can go a long way in improving India's economic future. The diesel deregulation has given more confidence to credit rating agencies like Moody's about India's fiscal health. But more importantly, it will also attract private investments in India's energy sector. Something that is urgently needed to make India's self sufficient in energy requirements. State control on fuel pricing has been the reason for failing to attract MNCs like Exxon, Chevron and Royal Dutch Shell to India's oil block auctions since 1999. Since oil exploration is technology and capital intensive, investments by the MNCs could go a long way in securing India's energy requirements.

04:05
 
Inflation has been a bane for India for quite some time now. At a time when growth had slowed down, inflation only made matters worse as the RBI was compelled to keep interest rates firm. But a relief has come about for the Indian economy in terms of lower crude prices. Indeed, India imports around 70% of the oil that it consumes. So, lower crude prices have an important bearing not only on the trade balance but also on inflation.

The first big impact has been with respect to transportation. With prices cooling off, consumers have been willing to expand their wallet now than what it was before. Transportation also influences food prices. With the fall in crude prices, freight and transportation costs for ferrying fruits and vegetables will also come down. And help bring down food prices in turn. The fact that the government has capitalised on this lower crude price trend to bring in reforms with respect to diesel and gas is also an encouraging sign. But the real test for the government will be a scenario when crude prices again begin to spike. Will the government then fiddle with diesel and gas prices again? While the current steps are in the right direction, the government would also do well to ramp up storage facilities so that food grains are not allowed to rot. Some of these structural changes are bound to have a positive impact in the longer term in terms of keeping inflation down

04:30
 
In the meanwhile, the Indian stock markets pared early gains but continued to remain firm in the post noon trading session. At the time of writing, BSE-Sensex was trading higher by 183 points (0.7%). Barring realty, all the sectoral indices were trading in the green. Stocks from capital goods and pharma were among the leading gainers. Majority of the Asian stock markets were trading in the green led by Japan and Hong Kong. But the Chinese index is trading negative. European markets have opened the day on a mixed note.

04:50  Today's investing mantra
"The investor of today does not profit from yesterday's growth" - Warren Buffett

Editorial note: Please note that there will be no issue of The 5 Minute Wrapup on the 23rd, 24th and 25th of October on account of Diwali. On behalf of the entire Equitymaster team, we wish our readers a very Happy Diwali!
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