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Agitations hit government's market reforms plans

Economic reforms take a backseat as corruption-related agitations by crusaders of public probity - Anna Hazare and Baba Ramdev - put the government on the mat over the last few months.

B.S. Srinivasalu Reddy | June 14, 2011 | Updated 09:57 IST

Economic reforms have taken a backseat and market sentiments dented as the Centre has got into the fire fighting mode to douse the fires of scams, black money and corruption-related agitations.

As if the scams that tumbled out of the cupboards of United Progressive Alliance (UPA) ministers - ex and current - were not enough of a headache for the Centre, agitations by crusaders of public probity - Anna Hazare and Baba Ramdev - have put the government on the mat over the last few months.

Unlike in the first tenure of the UPA government, when it had put the blame on the Left Front's stranglehold for lack of reforms, the UPA-II has none to blame this time, but itself, punters feel. Foreign direct investment (FDI) in insurance and retail, fuel sector decontrol, fertiliser pricing decontrol, action against corruption and banking sector reforms have been hanging fire for years, much before the crusaders of public probity took to the streets.

The disinvestment target for the current fiscal is expected to go haywire, with the markets remaining range bound and the Centre having to look at other sources as foreign investors are not forthcoming to fund the $1.5 trillion needed to fund infrastructure projects in the country.

"They (political developments relating to probity agitations) don't augur well for the capital markets. The government will continue to be in non-stop fire fighting mode, and so decision making would continue to stand paralysed," said K.N. Sreenivasan, head-institutional equity sales of Emkay Global Financial Services.

Hike in FDI limit in insurance sector from 26 per cent to 49 per cent can boost availability of longterm capital for funding ambitious infrastructure sector projects, while FDI in retail is expected to increase the qualitative employment opportunities. Fuel sector decontrol could directly address the vexed issue of spiralling government deficit. Banking sector reforms will enable consolidation in the banking sector and issuance of new bank licences, making the banking sector more vibrant.

"There is definite impact on the reforms. This is seen from the deferment of diesel prices on the reasoning of the current agitation," said Kishor Ostwal, chairman and managing director (CMD), CNI Research.

The equity market is running at the lower end of valuations with no retail participation and drop in volumes. The total turnover of the market - both BSE and NSE put together - which used to cross Rs 1.5 lakh crore struggled to cross the Rs 1 lakh crore-mark on Friday. "All negatives are factored in and the market may rise on even a little ray of hope of clarity on these (corruption and black money) fronts. The only condition where the market may react negatively by 10 per cent could be the fall of the government due to the aforesaid reasons," Ostwal added.

Corporate capex is in a state of limbo, and some signs of a slowdown in consumption are already emerging. Without economic reforms the transition from the government-led consumption to private-led consumption would not be possible, feels Sreenivasan.

Investors have still not lost faith in India's long-term growth potential, which is why markets are still not cracking despite the spate of negatives news one after the other. The major indices - BSE Sensex and NSE Nifty - have remained in a range over the last three weeks.

Courtesy: Mail Today 

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