The fizz in Indian shares is back after the ruling party in New Delhi won a record number of seats in provincial elections to two state assemblies, emboldening the central administration to push ahead with vital reforms that are needed to revive investment and bolster growth.

Even before the results of the elections were released last Sunday, the government moved closer to dismantling energy subsidies that have been burning a huge hole in the budget and announced baby steps to revamp stifling bureaucratic labour administration blamed for putting off businesses from building and running factories.

New Delhi also took decisions to clear a mess in the coal sector that has severely dented output and made the country a net importer of the crucial raw material despite having one of the world’s largest coal reserves.

The Bharatiya Janata Party (BJP) led by Prime Minister Narendra Modi won a decisive victory in the northern state of Haryana, and emerged as the biggest player in the western state of Maharashtra – whose capital is the financial hub of Mumbai – humbling not only the rival Congress party-led coalition that controlled the state for 15 years but also its erstwhile ally the Shiv Sena.

“We believe the state election results are likely to embolden reform momentum and improve BJP’s representation in the Rajya Sabha over next two years,” Citigroup economists Rohini Malkani and Anurag Jha wrote in a note, referring to the upper house of parliament where the opposition holds sway and can stall legislative business.

Modi’s National Democratic Alliance has an overwhelming majority, 336 of the 545 seats in the Lok Sabha, or the House of the People, but only has 63 members in the 250-seat Rajya Sabha. While representatives to the lower house are directly elected by the people for a five-year term, members of the elder house are elected by lawmakers from state assemblies and Union Territories.

In other words, by gaining control of state assemblies, the BJP stands to gain greater representation in the Rajya Sabha, giving it the numbers to approve tougher reforms.

Thumbs up

This was why investors, which had been on a profit-taking mode for weeks, resumed their buying spree. While the 50-share Nifty snapped a run of four weekly losses and rebounded 2.8 per cent, the top-30 Sensex chipped in with a gain of 2.6 per cent in the holiday-shortened trading week. The mood during an auspicious “moorat” session, signalling the start of new year for the trading community, was also upbeat with both the indices inching further higher.

“The sparkle is back,” said equity salesman Mukesh Dalal. “The fuel reforms will improve profitability of companies and provide considerable subsidy savings for the government that can be channelled into productive uses like investment in infrastructure.”

The government removed price controls on diesel, which is widely used in India to power cars, sport utility vehicles, trucks, buses and electricity generating sets. By a stroke of luck, thanks to falling world crude prices, the move led to a Rs3.4 per litre drop in pump prices, giving much needed relief to consumers battling inflation.

Oil marketing companies such as Hindustan Petroleum Corp, Bharat Petroleum Corp and Indian Oil Corp, can revise their prices based on crude price moves overseas but there is a cap on the upward rise a month. Petrol pricing was freed some years ago and only prices of kerosene and cooking gas are state-administered, but here too the government has decided to plug leakages by direct cash transfers to the needy.

“Diesel de-regulation is likely to reduce fuel subsidy by Rs600 billion annually (0.5 per cent of GDP),” Citigroup economists said.

Investment firm Jefferies said state-run Hindustan Petroleum Corp was likely to benefit the most from the freeing of diesel pricing and raised its target price on the stock to Rs640 from Rs570. The share closed at Rs526.95 this week, up nearly 2.8 times from a year earlier.

“We estimate a Rs0.5/litre expansion in diesel marketing margin increases 2015-16 earnings per share of HPCL by 36 per cent, BPCL 20 per cent and IOC 16 per cent,” Deutsche Bank said.

Boost for ONGC

After dilly-dallying for months New Delhi raised the price of natural gas to $5.6 per million metric British thermal units (mmbtu) effective November 1, 2014 from $4.2, the first increase in five years. Although the rise was lower than an expected $6.5, a new formula based on gross calorific value for the revision would be comparable to $6.1 on a net calorific value basis that was used for the old price, according to analysts Harshad Katkar and Amit Murarka at the German bank.

The new pricing is silent on deep-sea gas, costs of which are strikingly higher. It may not be profitable for companies to pursue exploration in ocean beds, such as off the east coast. However, this is not the last of what we have heard about gas pricing, and there is a strong likelihood of further upward revisions sometime in the coming year.

One of the beneficiaries of the gas and diesel changes would inevitably be state controlled Oil and Natural Gas Corp (ONGC), which is made to foot part of the subsidy bill the government incurs for keeping energy prices within reach of the poor. The company, India’s biggest oil and gas producer with fields across the world, is expected to see 2014-15 earnings rise by Rs19.3 billion due to the gas price rise and by Rs46.3 billion in the following year, JP Morgan said, quoting a company briefing.

The company should also see savings from cross subsidies, helped by the drop in crude prices and diesel deregulation, further bolstering earnings.

New Delhi, which owns nearly 69 per cent of ONGC, is readying for a five per cent divestment, aiming to pocket about $3 billion. The sale, expected in November, will be a vital test for the government’s asset sale programme to raise Rs584.25 billion in the current financial year ending on March 31.

Coal India, the world’s largest coal miner that is nearly 90 per cent owned by India, is another divestment target with a 10 per cent stock sale.

Inflation, earnings

Subdued global oil prices should provide a shot in the arm to India, which imports about 80 per cent of the oil it consumes. The drop in fuel costs, particularly diesel, will soften price pressures across sectors, leave more money with consumers to spend and likely pave the way for the central bank to lower interest rates.

Economists Indranil Sen Gupta and Abhishek Gupta at DSP Merrill Lynch (India) are betting on the Reserve Bank of India (RBI) to start cutting rates from early 2015, taking cue from a downward trajectory in inflation. The consumer price index for September dropped to a lower-than-expected 6.46 per cent from 7.8 per cent in the previous month, with core non-food inflation down at 5.4 per cent from 6.4 per cent.

“We continue to expect RBI Governor Raghuram Rajan to cut policy rates 75 basis points in 2015 from February as he gets greater clarity about meeting his 6 per cent January 2016 CPI inflation target,” the economists said in a report.

Earnings from several blue-chip companies will be the focus in the coming week. These include Maruti Suzuki , the country’s biggest car maker, the No. 2 lender ICICI Bank, top utility vehicle producer Mahindra & Mahindra, leading mobile services operator Bharti Airtel, consumer products giant Hindustan Unilever and pharmaceutical firms Dr. Reddy’s Lab and Ranbaxy Labs.

Other big companies set to release quarterly results are Tech Mahindra, Bharti Infratel, ING Vysya Bank, Nestle India, Ambuja Cements, IDFC Ltd and Jubilant Food Works.

 The writer is a journalist based in India