Our sources suggest that the government is about to launch a wave of reforms over the next month as part of a strategy which is likely to culminate in the general elections a year hence.

With significant progress now being made on critical structural issues such as the coal-power-SEB mess, we maintain our FY13 GDP growth estimate at 6.3 per cent; introduce our FY14 GDP growth estimate at 7.1 per cent; raise our Sensex target of 19,000 to 23,000.

Given that a number of investors have been caught on the wrong foot by the Indian government’s appetite for reform, we expect panic buying of Indian equities over the next month or so followed by a cooling off during the Winter Session of Parliament in late November-December.

Our extensive discussions with sources in Delhi over the past month suggest that the UPA’s recent burst of reforms is not a flash in the pan. In fact, it seems to be a part of a three stage political and economic plan which looks likely to climax in general elections a year hence.

Step 1 involves announcing a barrage of reforms between now and mid-Nov including reforms (eg. land acquisition Act, FDI in Insurance, Pension Bill, etc) which are certain to be blocked by the Opposition (thereby enhancing the Congress’ reformist credentials). Step 2 is to woo regional overlords in Q4 of FY13 in states such as UP, Bihar and Orissa with a view to weaning them from the Opposition and creating pre-poll alliances. Step 3 in the first falh of FY14 involve accelerating spending on Food Security, universal healthcare and other social schemes and then triggering General Elections during the Monsoon Session.

The economic reforms announced in September 2012 and the series of reforms the reforms expected in October should improve equity capital availability in India thereby facilitating a cyclical recovery. Whilst we expect GDP growth in India in FY13 to be recorded at 6.3 per cent YoY, GDP growth in FY14 is likely to record a cyclical upturn at 7.1 per cent YoY assuming: normal monsoons, a marginally lower crisis factor than that prevailing in FY13, and a jump in the central government's revenue expenditure in a pre-election financial year.

Based on both top-down and bottom-up estimates, we expect FY14 Sensex EPS to be at Rs 1,350 (10 per cent growth compared to our FY13 estimate of Rs 1,229). Applying to this a forward P/E multiple of 17 times, in-line with India’s average over the last six years, gives us our new Sensex target of 23,000.

This rally is unlikely to be a linear affair and there are three key risks to consider. Corporate India’s balance sheets are in worse shape than they have been for over ten years and the banking sector’s dysfunctional loans are almost as big as the networth of the sector. Both of these factors will be major retardants to a strong economic recovery in FY14.

The government’s disinvestment programme in FY13 amounts to $3 billion. Add to that another $2 billion of QIP raises from the private sector and we are likely to have around $5 billion of fresh paper hitting the Indian market. This could reduce the upside available at the index level in FY13. The Winter Session of Parliament is likely to produce the usual antics that we have all got used to and some investors will be disheartened by this.

In combination with QE cooling post the US Presidential elections, this could well lead to a fade in the rally in December.