Brightening prospects for passage of a tax reform should underpin Indian shares in the coming week after Prime Minister Narendra Modi and opposition Congress party leader Sonia Gandhi held a meeting on Friday, signalling a thaw to parliamentary deadlock that has held up vital policies essential to enable faster growth.
The Goods and Services Tax (GST), which would tear down trade barriers within the country, is scheduled to be launched from April 1 next year. But for this to happen, the proposal, the biggest tax reform since India’s independence in 1947, must be approved by both houses of parliament. While the ruling Bharatiya Janata Party-led coalition has a two-third majority in the lower house, it does not have the numbers in the upper house and this has stalled the government’s plans.
“If we look at ease of doing business, the GST is a brahmastra [powerful weapon] to kick-start GDP,” Sunil Kanoria, president of Associated Chambers of Commerce of India, told the Economic Times.
“Although we say India is a united union and is one country, to do business within states is a nightmare. I have experienced this myself in our businesses,” said Kanoria, who is also vice-chairman of SREI Infrastructure Finance Ltd.
The GST would replace multiple levies imposed by central, state and local bodies and make the country a common market. Economists, companies, investors and market participants believe the tax reform is crucial to speed up economic activity.
Ahead of the late evening meeting between the rival leaders, the top 30-Sensex and the broader 50-share Nifty gained on optimism about the GST, which is one of the main legislations envisaged in the winter session of parliament that began on Thursday and runs until December 23.
“The market’s expectations from the parliamentary session are pretty low. So, if anything positive comes out then that could be the trigger for the markets,” Prasun Gajri, chief investment officer at HDFC Standard Life Insurance Co, told Bloomberg TV.
The Sensex climbed one per cent and the Nifty rose 1.1 per cent, both notching their second consecutive week of gains.
Manufacturing companies and logistics firms would be gainers when the GST comes into force. Stocks that could benefit from GST include Maruti Suzuki, the country’s largest car maker, utility vehicle and tractor producer Mahindra & Mahindra, Amara Raja Batteries, Container Corp of India and AllCargo.
Breaking the ice
The meeting at the prime minister’s residence was the first between Modi and Gandhi since Modi swept to power 18 months ago. Former prime minister Manmohan Singh also participated in the talks, which Finance Minister Arun Jaitley said were inconclusive.
“The government presented its position on the GST and its importance, and the Congress leaders outlined the grounds for their opposition to the amendment,” Jaitley said. “The Congress leaders will take some time to discuss the issue within their party before coming back to us.”
The previous session of parliament was a washout with opposition parties stalling all legislative business. As the political impasse thwarted awaited reforms, large foreign funds, the main driver for stocks, were disappointed and they began voting with their feet — pulling out cash and triggering a stocks slide.
In November, for instance, foreign investors have dumped stocks worth nearly $800 million (Dh2.9 billion), reducing the net inflow in 2015 to about $3.6 billion. This is not a pleasant indication for an economy that is forecast to register the fastest growth among major nations this year, and it shows the inherent difficulties that India faces to ramp up economic activity.
So much so the baby steps to resolve the impasse would undoubtedly boost the outlook for reforms and draw back investors. A humiliating defeat for the BJP-led alliance in state polls in Bihar after an acrimonious campaign probably prompted New Delhi to temper its stance and invite the Congress party to talks.
The stage for the event was set by Modi who made an impassioned speech in parliament on Friday, where he gave credit to previous administrations and extolled lawmakers to set aside petty politics and work in unison for the betterment of the people.
Rates seen on hold
The central bank is widely expected to keep its main policy rate unchanged at a scheduled meeting on Tuesday, after slashing by 125 basis points since mid-January to 6.75 per cent. Although inflation has remained within the Reserve Bank of India’s threshold, there are lingering worries about pressure building up.
For one, the rupee has taken a knock from the foreign selling of bonds and shares worth a combined $1.4 billion so far this month. The Indian currency slipped to as much as 66.8850 against the dollar, its weakest in more than two years, before closing at 66.76. It has lost 2.2 per cent in November and this is bad news for imported items.
Even if global oil prices are subdued, the rupee’s fall would make the landed cost of fuel costlier and put upward pressure on inflation. As India imports about 80 per cent of the oil it consumes, this is a major concern.
The good news, however, is that the economy is picking up steam. Economic growth in the three months ended September is expected at 7.3 per cent, topping 7 per cent for the third straight quarter, and outpacing China’s 6.9 per cent expansion. The latest data is due on Monday.
Oil product consumption in October shot up at the fastest pace in 10 years, underscoring enhanced economic activity. This was reinforced by robust car sales in the festival month as consumers resumed spending more freely than before. That showed confidence was building up about jobs, incomes and the outlook for growth.
The writer is a journalist based in India.