World Economy

Why Abenomics and Modinomics are poles apart

Japan's Prime Minister Shinzo Abe and Indian Prime Minister Narendra Modi
Tomohiro Ohsumi | Bloomberg| Getty Images, Raveendran| AFP| Getty Images

Two leaders with clear economic agendas to revive their country's economic prospects, and stock markets riding high on waves of optimism.

It's not too difficult to see the similarities between India's Prime Minister Narendra Modi and his Japanese counterpart Shinzo Abe, but perhaps the links end there.

"Our view is that India and Japan face very different sets of problems, so 'Modinomics' and 'Abenomics' cannot be readily compared," said Clem Miller, investment analyst with Wilmington Trust Investment Advisors in Baltimore, using the terms often used to describe the economic policies of Modi and Abe.

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"India's biggest problem is a massive infrastructure deficit - it needs power plants, highways, railways, clean water. It has a growing population with rising incomes, but the infrastructure deficit constrains Indian growth," he said. "By contrast, Japan's biggest problem is a zero-growth, aging population."

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Abe came to power roughly 18 months ago, determined to end a cycle of deflation and lackluster growth in the world's third biggest economy through a three-pronged strategy involving monetary and fiscal stimulus and long-term structural reforms.

Monetary stimulus and optimism about Abenomics fuelled a 57 percent rally in the blue-chip Nikkei stock index last year.

India's stock market meanwhile surged to a record high after last month's landslide win for the pro-business Modi, triggering comparisons between Abenomics and Modinomics.

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"Commentators have been quick to conclude that the rally in Tokyo's stock exchange that followed Japan Prime Minister Shinzo Abe's victory, could be mimicked by the Indian markets," analysts at DBS Bank said in a research note last month.

"While the upgrades/re-rating to the Indian equity markets is not surprising, the comparison ignores some ground realities. Of all the catalysts that triggered the surge in Japanese stock markets last year, only one is applicable to India's situation: a stable government at the center," they added.

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Miller at Wilmington Trust Investment Advisors adds that because India is decentralized, Modi is constrained in what he can do to at a national level to boost the long-term growth prospects of an economy hampered by high inflation.

"By contrast, Japan is highly centralized, so Abe can achieve a lot with monetary policy, taxes, and incentives, if he can obtain political backing at the national level," he said.

The Bank of Japan is committed to pumping 60-70 trillion yen ($589-$687 billion) into the economy a year to boost inflation and Tokyo just announced plans to cut the corporate tax rate to 30 percent in the years ahead from around 36 percent now.

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Honeymoon over

Abe, however, has also come under criticism for not doing more in terms of long-term structural reforms.

"I'm afraid that some of what Abe may be doing are half measures and may not be going far enough," Douglas Wolford, president at Convergent Wealth Advisor in Washington, told CNBC earlier this week.

"Take by contrast, what Modi is doing in India. India was rated by the World Bank as the 134th best place to do business in the world out of 189 countries. It came in just in front of the West Bank and Gaza and Modi recognized that -- just recently he increased rail fares 14 percent, freight rates 6.5 percent," he added.

"These are typically hot topics politically in India – everybody stays away from rail fares. I think Abe needs to do some of the same things in Japan," Wolford said.

In addition to last week's hike in rail passenger to help fund investment, Modi's government has cheered markets with taking immediate steps to help contain inflation such as ordered a crackdown on hording to contain rising food prices.

The danger for Modi, say analysts, is that a failure to maintain the reform agenda could lead to the same disappointment that has undermined Abenomics and the Nikkei's stellar rally.

"The Modi government is still in the honeymoon phase, while Abe's government no longer enjoys that advantage," said Miller.