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Modi's Economic Roadmap Wins Praise, May Boost Cyclicals

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Modi's Economic Roadmap Wins Praise, May Boost Cyclicals

Indian stock markets have hit successive record highs for three consecutive days since Friday. The BSE Sensex is up over 21 per cent so far this year, outperforming a 5 per cent gain in the broader MSCI Asia-Pacific index excluding Japan.

Markets have run up on expectations of reforms and optimism about a recovery in the domestic economy. The new government's economic roadmap for the next five years, outlined by President Pranab Mukherjee yesterday, seems to have gone down well with the Street. (Read: Top 10 Economic Priorities of Narendra Modi Government)

Sanjeev Prasad of Kotak Institutional Equities says the focus on development and the broad strategy to achieve the same is very credible. The government clearly understands that its election mandate is for "development through good governance", he added.

A number of the economic goals that the new government announced were also being pursued by the UPA government. For instance, controlling inflation and bringing the economy back on track are themes that former finance minister P Chidambaram constantly harped on. To a large extent, Mr Chidambaram was successful in stabilising India's GDP after a near halving of growth between 2010 and 2012.

Like the UPA government, Mr Modi's government has also promised speedy implementation of Goods and Services Tax for which states need to be brought on the board.

However, one area where the new government will want to move quickly is to push manufacturing growth, which has weighed down on India's overall growth for the last two years.

India's manufacturing sector grew by 1.1 per cent in 2012-13 and contracted by 0.7 per cent in 2013-14, leading Mr Chidambaram to describe the manufacturing sector as the "Achilles Heel of the Indian economy".

Mr Modi, with the strongest mandate in last the 30 years, has already signaled that his government will be vastly different from the previous regime, which suffered from what many analysts call policy paralysis.

The new government has also made it clear that it will make India's tax regime non-adversarial and conducive to investment. In simple words, Mr Modi may do away with retrospective tax laws, which have been described as the single biggest impediment for foreign investment into the country.

"One of the standout differences between similar addresses in the past has been the strong focus on economic revival. For investors, it is important to note that reining in inflation, reigniting the investment cycle and restoring the confidence of investors were highlighted as key priorities for the new government," said Deutsche Bank analysts Abhay Laijawala and Abhishek Saraf.

The one area where the new government has not spelt its stance is subsidies, which likely cost a little over 2.2 per cent of India's GDP in 2013-14. Announcement on subsidies will surely be a part of the budget announcement, due for the second week of July. The budget will also be the true test of the government's intentions and will show if the government can walk its talk.

For common investors, the new government's economic policies is likely to translate into further gains for cyclical stocks, many of which have already rallied sharply over the last few months. Deutsche Bank has compiled a list of stocks that will be key gainers from the government's push on economy.

1) L&T, Siemens, ABB, IRB Infra, UltraTech, Shree Cement, JSPL and Sail should benefit because the government wants to modernize railways, develop 100 new cities, come up with new industrial regions, quicken National Highway projects and build low cost airports.

2) L&T, BHEL, Pipavav Shipyard, Bharat Forge, M&M and Tata Motors could gain from the government's focus on liberalising foreign direct investment especially in defence and also because the government wants to promote labour-intensive manufacturing.

3) Jain Irrigation can be a beneficiary from the government's focus on micro-irrigation.

4) Coal India, JSPL, Sesa Sterlite, Hindalco and Bhel could gain because the government has promised transparent and time-bound clearance for environment and forest approvals. So, power projects would no longer be stuck for want of speedy clearance.

5) Power Grid, ABB and Hindalco may benefit from government's focus on augmenting electricity generation capacity.

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