Mar 17, 2017 08:10 AM IST | Source:

Are markets simply high or on a high? 10 reforms which are still work-in-progress

For a further rally from current levels, the government now has to walk the talk in terms of reforms.

The Indian market touched fresh highs earlier this week after the ruling BJP gained strength in state election results especially in Uttar Pradesh, which has now further strengthened the reform agenda.

The Nifty scaled past 9,100, while the S&P BSE Sensex is trading comfortably over mount 29,000.

But, for a further rally from current levels, the government now has to walk the talk in terms of reforms and earnings momentum has to pick up the pace which has not yet happened. The hope-based rally has already fueled valuations near long-term averages and further upside looks capped, experts suggest.

The Goods & Service Tax (GST) is one big reform, which could now become a reality but the full impact on the corporate balance sheet would still take time. There is too much riding on the reform process as well as on earnings and if the government fails to push through, the big rally might come to an end, fear analysts.

GST and Direct Benefit Transfer (DBT) for food will likely be executed over the next few months, but analysts do not expect the government to take up contentious reforms such as labour, land acquisition or even privatization of PSUs in its current term.

“For a real breakout scenario, I think what the markets would want are some of the big bang reforms so to say and the biggest of all of them -- we have been talking about the state of PSU banks, the banking system, asset quality and the fact that they need so much of capital,” Nilesh Shah of Envision Capital said in an interview with CNBC-TV 18.

The Indian market’s valuation is at the upper ‘limit’ of its historical trading range except for the ‘euphoria’ phases. In hindsight, the ‘euphoria’ phases were simply periods of mis-judgement about the earnings outlook for the market.

“It is imperative that the market’s expectations of strong earnings growth to which current stock prices are tethered to come through. Otherwise, current ‘high’ valuations may simply mean that the market was ‘on a high’,” Kotak Institutional Equities said in a


On valuations, the only thing we can say with some certainty is that the Indian market is trading at 21.6X FY2017E ‘EPS’. “Valuations beyond that reflect the combined predictive capabilities of the Street, a somewhat dubious thing to rely on based on past experience. We are not sure if earnings are driving stock prices or stock prices earnings,” said the report.

Most analysts expect Nifty Index net profits to grow 19.4 percent and 16 percent for FY2018E and FY2019E. It is imperative for earnings to catch up with prices which are now trading at the higher end of long-term averages.

Here is a quick look at top 10 reforms according to Kotak Institutional Equities which are still work in progress and are yet to get implement:


The GST Council is expected to approve two crucial legislations at its meeting on Thursday which would take the implementation of GST closer to reality. GST implementation is likely from July 1, 2017. It will likely result in a higher tax-to-GDP ratio in the

medium term and reduce India's consolidated fiscal deficit.

DBT (Direct Benefit Transfer):

The government has started DBT for kerosene in a phased manner from April 1, 2016. Jharkhand state has moved entirely to DBT for kerosene. The government has already implemented direct cash transfer subsidy for LPG (from January 1, 2015) on a national basis.

Direct cash transfers for subsidies on fertilizers, food and fuels as and when brought under the scope of DBT will reduce leakages in the current public distribution system. States are responsible for distribution of subsidized food and kerosene under the current public distribution system.

Restructuring of PSU Banks:

The government announced Project Indradhanush in August 2015 to improve the performance of PSU banks. The focus is on greater accountability and better governance of PSU banks and the government will provide Rs 70,000 crore of capital to the PSU banks by FY19.

The government has formed a Bank Board Bureau to oversee governance practices of PSU banks.

Power Subsidies, Tariff Increases:

Power tariff increases will reduce the subsidies of states and India's consolidated fiscal deficit. This will also address potential increase in NPLs in the Indian banking system.

NPL Situation:

RBI has allowed 5-25, SDR and S4A schemes and implemented several measures for increased monitoring of stressed accounts but has recently asked banks to make additional provisions against stressed accounts as part of Asset Quality Review (AQR) exercise. The parliament passed Insolvency and Bankruptcy Code Bill on May 11, 2016.

Reduction in SLR:

RBI has already cut SLR by 150 bps and this should be headed down over the next five years as GFD/GDP and public debt/GDP decline.

Divestment Programme:

The government announced a package of reforms for PSU banks. The government has identified certain PSUs (Bharat Pumps, BEML) for strategic divestment through a reduction in government stake to below 51% or closure.

Labour Reforms:

Andhra Pradesh, Gujarat, Madhya Pradesh and Rajasthan state governments have already implemented changes to labour laws to enable easier compliance with the new state laws and greater flexibility in hiring and retrenchment of employees. A few more are changing the labour laws in their states.

Land Reforms:

The government has let the Land Acquisition Ordinance lapse in August 2015 due to political opposition to its proposed amendments to the LARR Act, 2013. Land reforms may be done by states.

Tamil Nadu state government has already implemented its own land acquisition policy in January 2015 while Rajasthan is in the process of legislating its own land acquisition policy.

Reducing Bureaucracy:

The government has focused on empowering bureaucracy and streamlining decision-making.
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