Mumbai: While uncertainties about the sovereign debt problems in Europe continue to shadow global fund flows, the focus for investors in Indian shares this week will also be on whether the government decides to bite the bullet and push ahead with energy reforms.
A panel of cabinet ministers is scheduled to meet in New Delhi tomorrow to consider proposals that will pave way for eventually freeing the pricing of fuels such as petrol and diesel from government control.
There is speculation the ministerial panel will approve an increase of Rs3 per litre in the prices of the auto fuels. If it does happen, it would reduce a huge subsidy burden for the government and simultaneously boost the shares of oil refiners.
Stocks to watch would be state refiners like Indian Oil, Bharat Petroleum and Hindustan Petroleum that are currently only partly compensated for selling fuel at government-set low prices, while they have to buy oil at global rates.
Lack of support
It would also help oil producers like Oil and Natural Gas and Oil India that are forced to partly make up the losses. Market-determined pricing will bolster private-sector refiners like Reliance Industries and Essar Oil which currently have no subsidy support from the government.
"There is no doubt that energy reform is needed and this is probably an opportune time to get going," said equity trader Viren Dalal, who is recommending investors to buy state refiners.
"The economy is doing well and should be able to absorb the impact, but as always freeing fuel prices is a double-edged sword," he said. "It will fire up inflation and there will be more pressure for rate hikes."
Manufacturing growth had accelerated in May at the fastest pace in more than two years, boosted by rising new orders, a HSBC Markit survey of about 500 companies showed, underscoring the Indian economy was picking up steam.
Government data showed the $1.3 trillion economy, the third-largest in Asia after Japan and China, expanded an annual 8.6 per cent in the March quarter — a pace that is widely expected to be maintained through 2010-11.
"The Indian economy is hardly pausing for breath," Frederic Neumann, Hong Kong-based economist at HSBC, said in a statement. "Price pressures remain elevated and someone needs to apply the brakes."
Annual inflation is running shy of 10 per cent after hitting double-digits in February and policymakers have said containing prices would be a priority for the government.
"We will take into account the growth numbers and developments around the world in formulating our monetary policy," Reserve Bank of India Governor D. Subbarao said last week.
"Inflation is not at a peak, but it is still higher than we would like it. We would take inflation concerns along with growth to formulate monetary policy."
Notching gains
The top-30 Sensex climbed 1.5 per cent last week to 17,117.69, notching gains for a second week in a row, thanks to the growth numbers and evidence that business confidence was strong.
ArcelorMittal, the world's largest steelmaker, and South Korea's Posco last week signed preliminary agreements with the Karnataka government to build steel plants each with annual capacity of six million tonnes at a cost of more than Rs600 billion.
Other companies are also expanding capacities to meet higher demand in the fast-growing economy. Japan's Honda Motor Co, the world's biggest motorcycle maker, has started building its second motorcycle factory in India at an investment of about Rs5 billion to produce 600,000 units a year.
The privately held Hinduja Group, whose operations include large ventures in Europe, the Middle East and the Gulf, said last week it would invest as much as $12 billion to build 10,000 megawatts of power projects in India over five years. It includes a 1,040 megawatt plant it has already build in Andhra Pradesh.
The writer is a journalist based in India.
