By now, the alleged lack of so-called “Big Bang Reforms” in the highly anticipated, first full-year budget released last week by the government of Indian prime minister Narendra Modi has become common market talk.
The budget, after all, provided the opportunity for the Modi government — which came to power with a landslide majority — to “showcase itself,” said Nick Smithie, chief investment strategist in charge of Emerging Global Advisors’ emerging market investment strategy, and enact the kinds of difficult reforms that financial market participants and foreign investors would want to see enacted, and that are always easier to pass in the early life of a new administration.
Nevertheless, Smithie is one among numerous investors who believe the budget is solid and includes numerous items that will not only further bolster India’s strength as a leading emerging market economy but also contribute toward enhancing its investment appeal.
“Since the financial crisis, global growth has been disappointing and the market has rewarded those countries where there’s growth and reform,” Smithie said. “Both of these are present in India, where by 2060, growth is slated to overtake China’s.” India is a large and complex nation, said Peter Kohli, CEO of DMS Funds, and although many feel the speed at which reforms are taking place could increase, the progress thus far is significant for a country where economic liberalization, when it got going in the 1990s, represented a tremendous shift in mindset.
The budget is positive for inclusive growth in India, Kohli said, and that being India’s focus, “any Big Bang-type reforms undertaken at this point could possibly backfire.”
One area investors were disappointed about was the budget’s failure to address the hefty subsidies that the Indian government disburses for diesel, fertilizer and cooking gas, among others. Most investors had hoped for this, Smithie said, not least because India is a huge importer of oil and its current account deficit has been large because of this. The current low price of oil combined with the removal of subsidies could have helped India’s deficit problem, he said, however, there are other areas in which the budget is very positive for the Indian economy, not least increased funding plans for the development of infrastructure, which is badly needed in India, as well as measures to increase privatization and incite increased foreign investment into India. The budget also includes the introduction of REITS in the Indian market, calls for a reduction in corporate tax rates and allows foreign portfolio investors to invest directly in Indian companies, something that until now, could only be done by foreign direct investors.