Asia Economy

Can India's new finance minister deliver?

Arun Jaitley, Finance Minister of India
Narinder Nanu | AFP | Getty Images

India's newly appointed Finance Minister, Arjun Jaitley, has drawn a mixed response from investors amid concerns about his scant background in economics and a potential clash with the central bank over interest rates.

Earlier this week, Jaitley was named head of both India's finance and defense ministries in the new administration of Prime Minister Narendra Modi.

Jaitley, 61, a prominent corporate lawyer and former commerce minister, is said to be a close confidante of Modi.

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"A few things that people associate with the name Arjun Jaitley: he's the right hand man of Modi so presumably he will pursue a pro-reform agenda, but he doesn't have a background in economics. That's a concern for the markets," said Nizam Idris, managing director and head of strategy, fixed income and currencies at Macquarie.

Jaitley is inheriting an economy that's growing at its slowest pace in a decade and battling persistently high inflation and twin budget and current account deficits.

Dariusz Kowalczyk, senior economist and strategist, Asia ex-Japan at Credit Agricole said while Jaitley may not have extensive experience in managing public finances, he comes across as a strong leader.

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"I focus more on the kinds of policies he's looking to pursue. So far the comments have been balanced between fiscal stability, price stability and growth," he said.

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His budget that will be presented in July will be closely watched for further clarity on his vision for Asia's third largest economy.

"On the budget, the challenge will be to find sources of revenue. Given his background on investment he will likely focus on privatization because in slow growing economy it's difficult to get enough revenue from taxation," Kowalczyk said.

Potential collision course

Kowalczyk's main concern is a potential clash between Jaitley and the central bank where Governor Raghuram Rajan has made inflation targeting the corner stone of Indian monetary policy.

"Before becoming finance minister, Jaitley said he would focus on attracting foreign investment and facilitating domestic investors through a lower cost of borrowing - that puts him on a collision course with central bank," said Kowalczyk.

Past finance ministers "have successfully pressured the central bank. In emerging markets, it's difficult for a central banker to withstand strong government pressure," he said.

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A perceived divergence in the institutions' policy objectives could negative impact the Indian rupee which was recently stabilized though improved policy making by the finance ministry and central bank, Kowalczyk noted.

Idris agreed the relationship the market should keep its eye on the relationship between Jaitley and Rajan.

"Jaitley made the right move in meeting with Rajan as soon as he was appointed - that may have soothed market concerns for now," he said.