Reverse on taxes revives India markets

A whiff of fresh air is sweeping India, raising expectations for an end to policy paralysis that has blighted the country’s growth, widened current account deficit and driven the rupee to record lows. Immediately after Prime Minister Manmohan Singh took over the finance ministry last week, he indicated that two controversial tax announcements in the March budget -- which scared off foreign investors and triggered a stocks slide -- would be as good as put on the backburner or withdrawn. He also held a series of discussions with finance ministry officials and policy advisers, and stressed the need to “revive the animal spirit” to pump up the economy that has slowed to the weakest annual growth rate in nine years at 5.3 per cent in the March quarter. “If policy actions manage to revive corporate and consumer confidence, growth may accelerate into the second half of the fiscal year,” JPMorgan said, upgrading its rating of Indian equities to “overweight” from “neutral”. Among the items on the agenda for Singh to pursue on a war footing include opening up the $450 billion supermarket sector to foreign giants such as Wal-Mart and Carrefour, raising foreign investment limit in the pension sector to 49 per cent from 26 per cent and clearing the way for foreign carriers to own up to 49 per cent in domestic airlines. To overcome political gridlock, Singh’s economic advisers are working on a strategy to give states the right to allow foreign retail chains rather than a centrally-imposed policy for the entire country. This would save the government from having to face a vote on the issue in parliament. Trade Minister Anand Sharma, one of the reformists in the government, has said many Congress-ruled and some opposition-run states were ready to open the door to Wal-Mart and others, paving the way for development of warehousing, refrigeration and better distribution networks. India is one of the world’s leading producers of food items but a large portion of the output is wasted because of inadequate infrastructure and logistics. For instance, the country is sitting on food grain stocks of more than 80 million tonnes – much of these rotting or worm-infested in open fields with just a tarpaulin as cover. Economic pundits say big foreign retail chains with deep pockets could also build access directly to farmers and cut out the scores of middlemen that are rampant across India. This would help ensure better returns for the farmer and also lower prices to the consumer. “It is a win-win situation for India when retail chains come in,” said equity strategist V. Venugopal. “Improved efficiency in preservation and distribution can cool food inflation, which is the biggest worry for this country.” In a sign of the change in mood, Swedish retailer IKEA, the world’s largest furniture maker, said it would invest 1.5 billion euros to open 25 stores in India. Little doubt the top-30 Sensex rallied 439.22 points – the most this year – or 2.6 per cent on Friday to 17,429.98. The widely tracked index gained 9.2 per cent in June, the biggest monthly rise since January. Although the environment was “clearly poor” because of risks including slowing economic growth, JPMorgan said valuations were trading at 12 times forward earnings, or one standard deviation below the 10-year historic average. It forecast the Sensex would reach 19,000 by the end of the year. The US investment bank was “overweight” on private banks because of strong growth in revenues on the back of loan growth momentum. It was also “overweight” on IT services and health care as part of a strategy of focusing on sectors that stand to benefit from rupee depreciation. Morgan Stanley raised its stocks rating to “equalweight” from “underweight”, saying India was now trading at a price to book multiple of 2.1 times, close to the trough valuations of 2 times in the 2002 and 2008 cycles. “This is an indicator of the extent to which the India market is already pricing in the adverse global environment and the current domestic situation of high inflation and slower trend gross domestic product (GDP) growth,” it said. The rupee rebounded 2.7 per cent last week, its biggest weekly gain in more than two-and-a-half years, to 55.60 against the US dollar, after plummeting to a record low of 57.32 the week before. The subdued rupee, which is still down 12.6 per cent from its 2012 high in early February, should boost exports. Along with lower oil prices, this could ease pressures on India’s current account deficit which jumped to 4.5 per cent of GDP in the March quarter from 1.3 per cent a year earlier. The writer is a journalist based in India.