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Can Modi lure foreign businesses to India?

Kevin Frayer | Getty Images

While the prospect of an election victory by Bharatiya Janata Party (BJP) leader Narendra Modi is fueling optimism of a turnaround in India's economic performance, questions remain about whether or not his leadership would be enough to lure foreign businesses to the country.

Factors such as bureaucratic red tape and regulatory flip-flops have been deterrents for foreign business looking to invest in Asia's third-largest economy – a market that holds a great deal of promise with a burgeoning middle class, a mammoth pool of talent and inexpensive manufacturing capabilities.

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As a result, foreign direct investment (FDI) into India has lagged far behind economic rival China. FDI inflows into India stood at $28 billion last year – just a fraction of China's $127 billion, according to the United Nations.

However, India watchers say while a Modi-led government would help shore up international confidence in India it may take many months before multinational companies feel comfortable committing long-term capital to the market.

"If Modi were to become the prime minister, sentiment would turn around fairly quickly. However, FDI isn't just linked to sentiment. There would have to be some pull factors that lead investment to increase," said Sonal Varma, India economist at Nomura.

"Business leaders are looking for policy stability, faster approvals, ease of doing business...one shouldn't expect the magic to come in the next few months," she said.

India's general elections, due to conclude on May 16, are likely to see the opposition BJP and its allies secure a narrow majority of legislative seats, according to an opinion poll by Indian news group NDTV published last week.

Timing, intentions unclear

Shishir Sinha, senior analyst, Asia Pacific at research firm Frontier Strategy Group says multinational companies should not expect any major policy changes or turnaround on economic growth before the new budget is announced in July at the earliest.

"The impact of any potential reforms would only be felt in the fourth quarter of 2014, assuming the government is able to pass changes in the parliament session between July and September," he said.

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On top of this, the true economic intentions of the BJP remain unclear, Sinha said. "The supposedly pro-business party has vigorously opposed multi-brand retail liberalization."

In its manifesto released earlier this month, the BJP said it would welcome FDI in sectors that would create jobs but not in multi-brand retail, effectively setting the stage for a rollback of this policy.

India's parliament signed a bill to open up the sector in late 2012, allowing foreign retailers to own up to 51 percent of their local operations.

Replicating the Gujarat model

While Modi is credited with turning Gujarat - the state where he currently serves as chief minister - into an investor-friendly economic powerhouse, experts highlight that replicating his success across the diverse country is a tough prospect.

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As chief minister of Gujarat, Modi has worked to encourage foreign investment, provide reliable electricity, build roads, and engage in intelligent urban planning. Annual economic growth in the state averaged more than 10 percent from 2006 to 2012 - well above the national average.

"Our Western clients are excited to have Modi in a leadership position. Those who have met him feel he has a very CEO-like approach. But they are discounting that leading the state versus the country is very different," Sinha said.

"It will come down to the cabinet he sets up, and the size of the majority he has, if he has a majority," he said.

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