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Tushar Poddar tushar.poddar@gs.com+91 22 6616 9042Pranjul Bhandaripranjul.bhandari@gs.com+91 22 6616 9169
India Macro Stance
 
June 16, 2009
 
Goldman Sachs Global Economics,Commodities and Strategy Researchat
https://360.gs.com
1
 
Reforms—great expectations
The formation of a new government has generated enormous interest and expectations onstructural reforms and its likely impact. We have written extensively on the kinds of reforms that India needs to pursue to meet its potential (see
Ten Things for India to Achieve its 2050 Potential
, Global Economics Paper No. 169, June 16, 2008). We nowtake a look at some of the major reforms that are on the table, assess the likelihood of their implementation, and the potential impact on the economy and particular sectors.We think that in general, structural reforms will be of a piecemeal nature and happengradually, without being “big-bang” or radical in nature. We expect the followingreforms to have a greater likelihood of getting implemented: establishing a pensionregulator; insurance reforms to allow capital raising and increasing the FDI stake to 49%from 26%; a big push in disinvestment to finance the fiscal deficit in the short term;removal of regulatory hurdles for investment in roads and ports; the implementation of the Goods & Services Tax; opening up mining to greater exploration; higher educationreforms and; reforms to boost to some extent, governance and efficiency of thebureaucracy. The reforms which we think have a lower probability of happening are:further opening up of the banking sector to foreign banks; changes to labor laws;outright privatization; FDI in retail; any major subsidy or expenditure reduction.In terms of potential impact, we see a big increase in infrastructure investment—especially in roads and ports. We also think that the insurance sector, metals and mining,education, and logistics will benefit from lesser regulation. The low likelihood of allowing more entry to foreign banks will shield the domestic banking sector fromgreater competition.
In Exhibit 1 on the next page, we outline potential major reforms, their likelihood of implementation and their impact on the economy.
 
Goldman Sachs Global Economics, Commodities and Strategy Research
 
India Macro Stance
2
 
Exhibit 1: Major reforms, likelihood of implementation, and potential impact
Reform AreaKey IssuesLikelihood of ReformDescriptionPotential Impact*
InfrastructureRoads & PortsHighPowerMediumAirportsLowUrban InfrastructureLowFinancial Sector Pension and Insurance HighSet up an independent regulator for pensions;more flexibility to state insurance companies toraise capital; increase FDI limit for insurancesector from 26% to 49%Greater channeling of domestic savings forlong-term investment; positive for insuranceand financing for infrastructureBanking LowFurther opening up banking to foreign banksIncumbents in banking system, includingpublic sector banks, to face less threat of competitionFinancial InclusionHighRevamping of banks and post offices tobecome outreach units for financial inclusionIncrease savings intermediated through theformal sectorGovernanceDelivery Monitoring Unit in thePrime Minister's OfficeHighMonitor flagship programmes and iconicprojectsMore timely implementation of governmentprojectsCivil services reformMediumStability of tenure of civil servants; ModelPublic Services Law giving greateraccountability and performance related payImprove efficiency and accountability of governmentJudicial ReformMediumRoadmap for judicial reform in 6 months;network of fast-track courts across countryMore timely enforcement of justiceRight to InformationHighPublic data policy to place all informationcovering non-strategic areas in the publicdomainGreater transparency in governmentfunctioningDivestment ingovernment companiesSell minority stakes ingovernment owned companiesHighSell stakes in government owned companies,especially to retail investors, while keepinggovernment ownership above 51%Garner funds for financing the fiscal deficit,including foreign funds; reduce govt. marketborrowing and lower bond yieldsPrivatization of government companiesOutright sale / sale to strategicinvestorsLowSell majority stakes and stakes to largestrategic investorsInability to bring in more efficient resourceallocation which could have happenedthrough outright salesFiscal Reforms Goods & Services TaxHighA unified nation-wide goods & services tax toreplace complex array of state and centraltaxes (Planned for April 1, 2010)Increase efficiency by creating a nationalcommon market; remove tax distortion inindirect tax structure; but will not generatelarge revenue increaseFRBM II Act
(FiscalResponsibility)
HighCredible commitment to bring down fiscaldeficit to acceptabl levels in medium-termInstil investor confidence in govt finances,boost domestic savings, reduce crowdingoutReduction in subsidy bill,especially oil and fertilizerLowLink final prices to global levels in order toreduce subsidiesReform of administered oilpricing mechanismLowReview of administered pricing mechanismunderway, but consensus will be difficultLabor reformsFlexibility in Hiring and Firing of WorkersLowLegal changes to allow greater flexibility to hireand fire workersReforms could have made private sectormore competitive and created opportunitiesfor unorganized sector workersEducationPrivate / foreign investment inhigher educationHighImproved investment climate for privateplayers; Bill to allow foreign universitiesMajor improvement in quanity and quality of higher education optionsFood Security & foodsubsidiesRight to FoodHighRight to food to all citizens; Rice/wheat atRs.3/kg to all poor families; better targeting topublic distribution systemFor equality and improved nutrition; couldhave large negative fiscal impactMining Development & Coal reformsOpening up Mining to greaterexploration and less regulationHighPrivate sector oil exploration model to beimplemented in other mining sectors;implementation of coal sector reform blueprintGreater private sector investment; positivefor metals and mining sectorGeneral liberalisationHighFDI policy likely to be investor friendly in somenon-strategic sectorsRetailLowUnlikely, in order to protect local players,especially in the unorganized sector
* Based on the likelihood of reform getting implemented
Public-Private partnership model to be mademore investor-friendly, especially in Roads andPorts; Major projects to be monitored directlyby PM's OfficeFDISpeedy regulatory clearance positive forroads and ports sectorsReforms could have removed distortions andcreated fiscal space for growth-enhancingspending on infra, health & educationPotential of enhancing availability of foreignfunds in areas which get liberalised
 
Source: GS Global ECS Research.
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