Before we get started this week, I want to send my thoughts and prayers to all the people in Japan who have suffered one of the worst natural tragedies in recent history. The images we see on TV are incredulous and almost impossible to believe. I do hope that the reconstruction efforts begin there in earnest and people get back to their lives as best possible.
Last week we had discussed the Indian budget for 2011-12 and how it has turned the investment community from negative to positive. What has also helped turn this tide are a couple of key political alliances which have finally agreed to work with each other in pushing ahead with reforms in India.
One of the key positives emerging from the Union Budget is structural reforms. While I am concerned about the ability of the government to meet its fiscal deficit target, after listening to several key policy makers post-budget, I get the impression that the government has begun the process of thawing a number of reforms which had been frozen for a while now. According to a prominent opposition parliamentarian, there could even be some bi-partisan support for a subset of these reforms.
Here are a few examples of what is under way:
Insurance — The Insurance Laws (Amendment) Bill, 2008, could increase the limit of Foreign Direct Investments in the Insurance sector to 49 percent from the current 26 percent. A parliamentary panel is to submit its report shortly before it can be introduced in Parliament.
Bond Market — The government has increased the foreign investor limit in corporate bonds by an additional US$20 billion over the earlier limit of US$20 billion. The additional limit will be available only for bonds issued by infrastructure companies and with residual maturity of over five years.
Banking — The Banking Amendment Bill will allow the shareholders of private banks voting rights in proportion to their equity holdings, thus allowing them a greater say (earlier capped at 10 percent). The Bill also paves the way for the Reserve Bank of India (RBI) to grant licenses for setting up new banks, which can increase competition in the system.
The Bill was cleared by the Cabinet last week to be tabled in the current session of Parliament.
Goods and Services Tax (GST) — A constitutional amendment bill is proposed to be introduced in Parliament to pave the way for the eventual application of a nation-wide GST. The bill will empower the centre to tax retail trade; give state governments the power to tax services and to set up a council for resolving disputes.
Corporate governance — The Companies Amendment Bill to be introduced in the current session of Parliament seeks to strengthen corporate governance and shift the burden of regulation of management to shareholders rather than the government.
Infrastructure financing — The Finance Minister announced the creation of an infrastructure debt fund in his budget speech. This fund would allow investors to invest in infrastructure projects which have completed the construction phase, with significant security cover provided by the government.
And there are other smaller initiatives underway as well. The tone has certainly turned bullish and with political will to take some major decisions, I am quite optimistic that the government will be able to pass meaningful reforms in the next two years.
And all of this is very important in the expansion of business and trade in India. We will see some solid profits from investing in India. The key, once again, is to be selective in your company purchases and having a strong stomach for volatility.
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