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Impact of Reforms - India Essay

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08 November 2012
Asia Pacific/India
Equity Research
Investment Strategy

India Market Strategy
Research Analysts
Neelkanth Mishra
9122 6777 3716
neelkanth.mishra@credit-suisse.com
Ravi Shankar
91 22 6777 3869
ravi.shankar@credit-suisse.com

STRATEGY

Reforms: The Past and the Future
Figure 1: Reforms bear fruits with a lag of 6-8 years

Source: Credit Suisse

As the government steps on the gas on economic reforms, the stock market has
responded positively, instinctively comparing it to reforms of the past. We
analyse history to get a sense of scale; and drill down on each proposed step.



Analysing past reforms: W e went through major reforms since 1991 and
the last 22 budget speeches to assess changes and their economic impact.
We re-discovered how dramatically the economy has changed: de-licensing
and de-reservation; import duties cut from 78% to 7%; NPAs down from 26%
to 2.5%; import licenses and dual exchange rates to open current account.



Proposed reforms too difficult or not important: All but three of 112
pending bills have either low probability or low impact, and the secular
decline in parliamentary and legislative activity compounds the issue.
Administrative changes are more likely by definition, but are not easy, and
their impact seems too far down the line.



Turning, but can’t make up for lost time: The change is encouraging and
the worryingly anti-business political rhetoric seems firmly behind us. Further,
in our view, reforms in India are largely independent of who rules: the
election schedule matters not. However, it can take 6-8 years from reform
intent to impact, and the investment cycle is unlikely to recover for the next
3-4 years. We maintain UW on the investment-driven sectors: sell L&T,
BHEL, Tata, SAIL and banks with investment focused balance sheets.

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