Modi win rouses hopes for India's sluggish economy

India's Prime Minister, Narendra Modi.
Raj K Raj | Hindustan Times | Getty Images
India's Prime Minister, Narendra Modi.

India's economy probably showed few signs of recovery in the March quarter, but Narendra Modi's thumping victory in the recent general election has raised hopes of an investment-led turnaround in the coming quarters.

A Reuters poll of 48 economists predicts no clear improvement in Asia's third-largest economy, which is likely to have grown by 4.8 percent from a year earlier, a tad better than 4.7 percent in the quarter to end-December. The GDP data is due at 1200 GMT on Friday.

If the forecast materializes, it would mark a second straight fiscal year of sub-5 percent growth - the worst slowdown in more than a quarter of a century.

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Modi won India's first outright parliamentary majority in three decades with a pledge to boost growth and create jobs, raising hopes among investors for a turnaround led by spending on infrastructure.

Ninety-three percent of CEOs in a polled carried out by one of India's industry chambers FICCI said they expect a substantial improvement in the near-term economic situation following the election of a strong government.

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"As soon as investors see first signals of growth-supportive policies, you will see a definite turnaround on the ground," said Adi Godrej, chairman of Godrej Group, a conglomerate with annual sales of $4 billion.

Godrej hopes that growth will pick up to 8 percent within two years. At the current rate, the Indian economy cannot generate enough jobs to employ the 10 million young people who enter its workforce every year.

Gridlocked

Capital investment contributes nearly 35 percent to India's economy, but it probably barely grew in the fiscal year that ended in March.

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Projects worth 6.2 trillion rupees ($105 billion) were shelved last year due to bureaucratic gridlock, according to CMIE, an economic think tank, the highest in the past 18 years.

Modi's reputation, assiduously built while running the western state of Gujarat, of speeding up implementation of infrastructure projects and promoting manufacturing has raised hopes of a similar push at the national level.

Best way to play India
Best way to play India   

Arvind Panagariya, an economics professor at New York's Columbia University who is tipped to get an advisory role in the government, has called on the new administration to revamp the cumbersome tax regime and boost capital spending.

But that's easier said than done. States wield much of the power in approving projects, while only a quarter of approvals come from federal agencies. High corporate leverage and rising bad loans at Indian banks are also weighing on investments.

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Stressed loans in India - those categorized as bad and restructured - total $100 billion, or about 10 percent of all loans. The debt-equity ratio of Indian firms, meanwhile, has hit a two-decade high of 97.9 percent, according to Nomura.

"Investor sentiment has changed but government needs to follow it up with action to address structural bottlenecks," says M.S. Unnikrishnan, managing director at capital goods maker Thermax, who expects a gradual recovery.

India expecting a lot from Modi: Indian industry chief
India expecting a lot from Modi: Indian industry chief   

Short-term steps to boost activity could also raise concerns about the new government's commitment to fiscal deficit reduction.

Adding to the growth challenge is an adverse global economic climate that is hemming in the country's exports growth. The sector accounts for nearly a quarter of the domestic economy.

Equally worrisome are the prospects of below-average monsoon rains this summer, which could hit farm output and fuel inflation. That would make it tougher for an inflation-focused central bank to lower interest rates to support growth.

Exuberance

Hopes of an economic revival have attracted copious capital inflows, triggering a rally in the country's financial markets.

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For some ebullient investors, this is the beginning of the strongest bull market. The BSE index is already the best performing equity index in Asia this year. The Indian rupee too, has hit an 11-month high to the dollar.

Such is the euphoria that Jim O'Neill, who had once called India the biggest disappointment among the BRIC economies, is asking the South Asian nation to be labelled as one of the 'fabulous five' economies instead of the 'fragile five'.

O'Neill coined the term BRIC in December 2001 to jointly describe the four biggest developing economies - Brazil, Russia, India and China.

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The 'fragile' tag came into vogue when the most vulnerable emerging markets were roiled by capital outflows from May to September last year after the U.S. Federal Reserve hinted it would wind down its monetary stimulus.

Unnikrishnan of Thermax, cautions against such "irrational" exuberance. "A child is born. It is expected he will do well and earn good money," he says. "But he is not going to earn money today."