Over the next 12-24 months, we expect the pace of reforms to pick up with the government initiating the following reforms:

(a) Further steady reduction in subsidies: For instance, the government announced a 10% hike in urea (fertilizers) prices and a new nutrient-based subsidy in February 2010. For gas, the government approved a revision of administered gas prices effective June 2010. Also, the government has increased domestic fuel prices twice so far in 2010 and has announced that gasoline prices will be market-linked from now. We estimate these measures will effectively reduce subsidy expenditure for an annualized rate of about 0.6% of GDP. We expect the government to maintain its path to reduce subsidy burden.

(b) Introduction of Goods and Services Tax (GST) system: A transition to GST would be an important milestone from a macro perspective, moving from the current system of different types of indirect taxes and multiple rates of indirect taxes. The new system would cover a wider base, including all goods and services. The current system taxes production, whereas the GST will aim to tax consumption. Indeed, current law levies taxes on the movement of goods from one state to other - effectively creating borders within borders. It distorts the allocation of resources and inhibits productivity growth. India's budget confirmed government plans to implement the consolidated nationwide GST system from April 1, 2011

(c) Direct tax reforms: These reforms aim to broaden the tax base and will minimize exemptions. The budget for F2011 has confirmed a plan to implement direct tax reforms as recommended in the direct reforms code (DTC) in F2012. The Ministry of Finance has issued a draft new code for direct taxation. The thrust of the new code, as its foreword says, 'is to improve efficiency and equity in direct tax system by eliminating distortions in tax structure, introducing moderate levels of taxation and expanding the tax base.' For broadening the tax base, the code will minimize exemptions. The removal of these exemptions will improve the tax-to-GDP ratio and efficiency in allocation of resources. The new code will also simplify the language and law to reduce litigation and check tax evasion. Moreover, the new code aims to encourage long-term savings. The tax incentives for savings will be rationalized. The code aims to follow the Exempt Exempt Tax (EET) rule, under which initial savings contribution and accrual of interest are exempt but withdrawals would be subject to normal taxes.

(d) Consolidation of the public sector deficit: The government has accepted in principle the recommendation by the 13th Finance Commission for a fiscal roadmap for fiscal deficit and revenue deficit for F2010-15. The commission's includes the following medium-term fiscal consolidation plan: (i) to cut the consolidated (centre plus state government) fiscal deficit to 7.3% of GDP by F2012 and 5.4% of GDP in F2015. (ii) This will enable the government to reduce consolidated public debt to GDP to 76.6% of GDP by March 2012 and 67.8% of GDP by March 2015.

Eoin Treacy's view "Governance is everything" has become a mantra at Fullermoney and the improving standards of corporate, civil and economic governance evident in India are a powerful tailwind for investors interested in the country. There has been a great deal of commentary on demographics in emerging markets being a positive force for economic growth but lowering the barriers to increased productivity for millions of new workers is at least as important. It is a point in India's favour that some of these obstacles are beginning to be tackled.

Infrastructure has long been India's Achilles heel, particularly when the country is inevitably compared to China. Progress on this front has been slow but is picking up pace. At least part of the reason that China is now focusing on moving up the value chain in manufacturing, investing in healthcare and developing the consumer economy is because the cost/benefit ratio for more infrastructure development is not nearly as favourable as it was because so much progress has already been made. India is at the opposite end of the spectrum. It already has a reasonably well developed internal market and a number of companies with dominant positions in high value added industries and services. India's infrastructure is coming from a low base so a comparatively small improvement can result in a large productivity boost. Provided the trajectory of improvement continues, it will remain a tailwind for long-term investors.

The wider market Bombay 500 rallied impressively today to test the 7500 level while both the Sensex and Nifty broke upwards from short-term consolidations in the region of the upper sides of their 10-month ranges. Downward dynamics would now be required to check potential for additional upside while sustained moves below the respective 200-day MAs would be needed to question the consistency of their medium-term uptrends.