Goldman Sachs, the American bulge-bracket investment bank, sent political waves throughout India last Tuesday when it issued an 18-page report entitled "Modi-fying our view: raise India to Marketweight.” The report recommended an upgrade in India’s investment prospects, from underweight to marketweight, based on a variety of factors. The news should have been welcomed in New Delhi where little economic news lately has been good news, with fiscal and monetary policy outcomes on a downwards trend after nearly a decade of high growth.
As the pun in the title of the report implies, instead of identifying any structural or competitive reasons to raise India’s investment grade, the Goldman report largely focused on the possibility of Narendra Modi’s election in 2014. This resulted in strong political blowback from India’s ruling Congress party, who accused Goldman Sachs of political interference. The Goldman report sees a possible resurgence in India’s now-lackluster growth following a shift to a BJP government.
In an interview with India’s Economic Times, Congress Minister Anand Sharma blasted Goldman, saying that it "is parading its ignorance about the basic facts of Indian economy; and it also exposes its eagerness to mess around with India's domestic politics.” In the same interview, he defended India’s UPA government as having provided a strong structural foundation for India’s global competitiveness.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
According to The Financial Times, "Investors, both Indian and foreign, have complained bitterly about the current government’s reluctance to approve and push through big projects in power and infrastructure and its inability to accelerate economic reforms. Mr. Modi is highly regarded in Mumbai’s business community for his record of decisiveness, quick project implementation and relative lack of corruption in Gujarat.”
Goldman is by no means the only foreign firm to fixate on India’s elections next year. Credit rating agency Standard & Poor’s (S&P) is focusing on India’s election as a threshold for its rating, which currently sits on the fence between investment-grade and junk (long-term debt at BBB-minus). According to the Wall Street Journal, S&P sees a mixed picture in India’s economy: its strengths being its low overseas debt, large foreign exchange reserves, and credible monetary policy. It punctuates India’s strengths with its weaknesses: "weak public finances and lack of progress on structural reforms.” Moody’s and Fitch – the other two large global ratings firms – also maintain India on the threshold between junk and investment-grade.
While Goldman’s report is bullish at the prospect of a BJP victory resulting in a turnabout in India’s economic fortunes, there remain risks that India could fail to capitalize on any potential stimulus it might receive from Modi’s potential election as prime minister. Most critically, the widely-expected contractionary move by the U.S.Federal Reserve Bank, when it begins “tapering” its bond purchases and puts an end to the easy availability of credit, is sure to shock India along with most other emerging markets.
Some analysts attributed the sharp crisis in the value of the Indian rupee in early autumn this year to the wide-spread expectation of a tapering off of the Fed's stimulus in September. In somewhat of a surprise move, the Federal Reserve announced that it would not begin tapering. The Indian rupee depreciated from 54 INR per U.S. dollar in January 2013 to a peak of 68 INR per U.S. dollar in early September, a few weeks before the Fed’s announcement. The Fed has indicated that it will take contractionary steps once U.S. unemployment sinks below 7 percent.
Whatever the result of India’s elections in May 2014, most analysts see the need for deep structural change and steps toward deregulation and liberalization if India is to galvanize global investors. Domestic Indian equities have been performing at all-time highs, despite the less favorable climate for foreign investors.
Ankit Panda is Associate Editor of The Diplomat. Follow him on Twitter @nktpnd.