Reforms: Time for the difficult ones?


Expectations are up on the reforms front as we approach the next budget. More so with Govt. showing some teeth now with respect to labor code. Govt. has introduced the new labor code bill in the lower house. If the labor bill passes the RS hurdle, it will be a big milestone in the reform agenda as this has been pending for decades. One of the key proposals in the labor code is with respect to Govt. taking executive power on fixing the threshold number for retrenchment (below the threshold, companies will not require Govt’s approval for retrenchment). If the threshold can be modified thro’ an executive action, not thro’ legislative approval (vide parliament), it will be a boost to investment. This in combination with the new tax code (15% tax for investments in new manufacturing) can be a game changer for attracting new investments in manufacturing, esp. in the back-drop of US-China trade frictions.

It doesn’t stop here. As some reports suggest, Govt. is closely looking at liberalizing the lease mechanism of agricultural land for industrial use. Though it is a state subject, if a central model code can successfully be adopted by interested state governments, then it can address one of the key structural supply side issues for unlocking manufacturing potential. While Govt. might do this quietly without brandishing this as a major land reform, the signs are there that the current administration is keen to get this out of the way.

If Govt. of the day can get these difficult reforms (land and labor) done, it will send a strong signal to investment community. This coupled with friendly taxation measures (either on DDT or LTCG) expected in the upcoming budget, one is looking at reform momentum gathering strong pace in the coming weeks and months. While market has started pricing-in this increased reform momentum, so far, this has been limited to select large-caps. Broader space is yet to see the benefits from improved traction in reforms. But, with early signs of visibility in closure of some of the stressed cases, both in NBFCs and in banks, thanks to quick responses from finance ministry (be in IBC amendments or special AIF fund for real estate stressed assets or recent SC ruling in Essar case etc.), it is question of time before the broader market picks up pace. In this context, current depressed valuation in the broader space is a great opportunity for investors with lot of patient capital.