Goldman Sachs - Great expectations on India reforms

The formation of a new government has generated enormous interest and expectations on structural reforms and its likely impact. We have written extensively on the kinds of
reforms that India needs to pursue to meet its potential. We now take 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 happen gradually, without being “big-bang” or radical in nature. We expect the following reforms to have a greater likelihood of getting implemented: establishing a pension regulator; 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 education reforms and; reforms to boost to some extent, governance and efficiency of the bureaucracy. 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 from greater competition.