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Modi Win Spurs Optimism India Economy Will Lead BRIC Rebound

May 17, 2014

Modi Victory Spurs Optimism India Economy Will Lead BRIC Rebound

Bharatiya Janata Party supporters wear masks of their leader Narendra Modi as they celebrate the party's win in the general elections, in Jammu, India, on May 16, 2014. Photographer: Channi Anand/AP Photo

India’s strongest electoral mandate in 30 years puts Narendra Modi in a position to pass measures to bolster Asia’s third-biggest economy, spurring optimism it will lead a recovery among the biggest emerging markets.

Modi’s Bharatiya Janata Party and its allies won about 61 percent of seats in parliament as voters punished the Congress party-led coalition for slowing growth, graft and Asia’s second-fastest inflation. If Modi pursues the anti-corruption policies he’s promised, India has the potential to grow about 10 percent annually for the next 20 years, according to Jim O’Neill, former chairman of Goldman Sachs Asset Management.

“This is the most positive development in India in 30 years,” O’Neill, who coined the acronym BRIC, referring to Brazil, India, Russia and China, said at the SkyBridge Alternatives Conference in Las Vegas yesterday. Modi’s victory is a “massive, massive positive” for the nation, he said.

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Stocks and the rupee jumped yesterday on optimism that Modi will make good on campaign promises to create jobs and attract foreign investment in all sectors except for multi-brand retail. He faces the challenge of boosting growth as Reserve Bank of India Governor Raghuram Rajan keeps interest rates elevated to stem consumer-price gains exceeding 8 percent.

“Rajan is looking to get a firm rein on inflation and is quite keen on a formal transition to inflation targeting,” Manik Narain, a strategist at UBS AG in London, said by phone. “It would be interesting to see if the BJP will endorse this, and this is a key uncertainty.”

India Growth

India’s economic growth will accelerate to 5.4 percent in the fiscal year ending March 31, from 4.4 percent in the previous 12 months, the International Monetary Fund predicted last month. The government estimates that India’s gross domestic product grew 4.9 percent in the 12 months ended March 31, near the previous year’s 4.5 percent, the slowest in a decade.

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The economic expansion of Russia, embroiled in tensions with neighboring Ukraine, will stay unchanged at 1.3 percent this year compared with the past 12 months, according to the IMF. China’s will slow to 7.5 percent from 7.7 percent, while Brazil’s will ease to 1.8 percent from 2.3 percent, it said.

“India looks set to be the first BRIC to rebound,” Rajiv Biswas, IHS Global Insight’s Asia-Pacific chief economist, said in a statement. “Overall, the BJP victory should set the stage for a revival in India’s economic fortunes and a stronger growth path for the Indian economy over the next five years.”

Possible Upgrade

Standard & Poor’s, which downgraded Brazil’s credit rating in March to one level above junk, said yesterday that Modi’s policies over the next few months will have significant implications for India’s rating. The company had warned that it could downgrade Asia’s third-biggest economy to junk status if the next government is unable to revive growth.

‘‘NDA’s strong showing indicates that it will have a reasonably good political platform to tackle structural issues,” said Takahira Ogawa, an S&P analyst, referring to the BJP-led National Democratic Alliance.

India’s rating may actually be considered for an upgrade if the new government cuts the budget deficit, simplifies rules on investment and production, and puts in place infrastructure such as roads, ports and schools, said Atsi Sheth, sovereign analyst at Moody’s Investors Service in New York. The company has a Baa3 rating on Asia’s third-largest economy, with a stable outlook, while S&P grades it BBB-.

India’s rupee yesterday surged past 59 per dollar for the first time since July. The S&P BSE Sensex increased 0.9 percent to a record 24,121.74 at the close in Mumbai, after swinging between a gain of 6.15 percent and a loss of 0.1 percent.

Reduced Uncertainty

“A government with a clear mandate reduces uncertainty and increases the chances of decisive policy action to address the economic challenges India faces,” said Thomas Rookmaaker, a Hong Kong-based director at Fitch Ratings. “The most salient issue for the new government from a sovereign credit perspective seems to get growth back to higher sustainable levels, which would require a strong pick up in investments.”

The BJP has lambasted Congress for jobless growth, promising in its manifesto to stem price gains and expedite foreign investment in most sectors. It also plans to give more power to India’s 28 states, create consensus to implement a goods and services tax and develop labor-intensive manufacturing.

State Obstacles

“While the election result will likely lead to an acceleration of reforms, markets have probably gotten a little ahead of themselves,” said Frederic Neumann, co-head of Asian research in Hong Kong at HSBC Holdings Plc. “Many of the needed reforms require the cooperation of local governments and the BJP will need to tread delicately to convince officials further down the ladder to throw their weight behind reforms as well.”

India’s constitution gives states control over decisions that are central to attracting investment, a devolution of power at the root of uniting a nation with 1.2 billion people. While the federal government can give tax incentives to industries and environmental permits for specific projects, state leaders have power to provide land-use permits along with electricity and water supply.

Congress saw its economic policies thwarted by state governments. Only nine states adopted the Congress’s 2012 blueprint to allow 51 percent foreign investment in multi-brand retail that would let Wal-Mart Stores Inc. (WMT:US) and other multinationals open outlets, a measure the BJP opposes.

State governments, including Modi’s Gujarat, opposed plans to implement a goods and service tax that is more than three years behind schedule. India’s Finance Commission, a constitutional body, estimated it could lead to 28.8 trillion rupees ($488 billion) in economic gains.

High Expectations

India’s budget gap narrowed to 4.6 percent in the year ended March 31 from 4.9 percent in the previous 12 months, Finance Minister Palaniappan Chidambaram estimated in February. The current-account shortfall was kept below $40 billion compared with a record $88 billion the previous year.

O’Neill, who said he had met Modi a number of times over the last 12 months, is a contributor to Bloomberg View, the opinion section of Bloomberg News.

The strength of Modi’s win raises expectations that he’ll speed up projects, reduce bureaucracy, ease labor laws and sell stakes in state-owned companies, according to Devika Mehndiratta, an economist with Australia & New Zealand Banking Group Ltd.

“The new government will have to tread carefully because expectations will move higher,” she said in a note. “There’ll be few excuses for them to shirk away from implementing at least some ‘big bang’ reforms.”

To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net

To contact the editors responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net Jeanette Rodrigues, Dick Schumacher


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