Economic Update: Government Policy announcements in September 2021.

Pro-growth government policies in September 2021 are propelling domestic stock markets higher.

The month that went by has seen the Indian Government taking several steps to offer relief to the telecom companies under pressure by large regulatory dues and attract foreign capital to the telecom sector.

The Union Cabinet approved a set of nine structural and procedural reforms to address the short-term liquidity needs as well as long-term issues of telecom companies. These measures included a relief on computing dues relating to AGR, adjusted gross revenue, a four-year moratorium on dues, and the option for the government to convert dues into equity after the moratorium period expires are key elements of the relief package approved by the Union cabinet. Vodafone India which has a debt of close to 1.9 lakh crore is likely to be a key beneficiary.

The cabinet also liberalized foreign ownership rules in the telecom sector by allowing 100% foreign direct investment through the automatic route. Currently, 100% FDI is allowed in the sector, but only 49% was on the automatic route, and any investment above that limit required government approval.

Another major announcement in September was the approval of a Rs 26,058 crore production linked incentive (PLI) scheme for auto, auto-components and drone industries to enhance India’s manufacturing capabilities. The incentive structure is expected to encourage the industry to make fresh investments for the indigenous global supply chain of Advanced Automotive Technology products. According to government sources, it is estimated that over five years, the PLI Scheme for Automobile and Auto Components Industry will lead to a fresh investment of over Rs 42,500 crore, incremental production of over Rs 2.3 lakh crore, while at the same time creating additional employment opportunities of over 7.5 lakh jobs.

Meanwhile, India’s manufacturing sector activities picked up in September 2021 as the easing of Covid restrictions helped in strengthening demand. The IHS Markit India Manufacturing Purchasing Managers' Index (PMI) improved from 52.3 in August to 53.7 in September – indicating an expansion in business conditions across the manufacturing sector. In PMI parlance, a print above 50 means expansion while a score below 50 denotes contraction. The expansion in Manufacturing PMI in September marks the third straight month of improvement in business conditions.

Economists believe that the Reserve Bank of India (RBI) is expected to continue with its accommodative stance in its October 6 to 8 monetary policy discussions. No surprises on the policy rate front are expected, especially at a time when the economy is expected to see the much-awaited boost in consumption triggered by the festive demand. Inflation as per the latest poll is forecast to be well above RBI's medium-term target of 4% but was projected to remain below the 6% upper threshold until at least end-2024.