Pacific Money

Will Investors’ Gamble On Modi Pay Off?

Some analysts are bullish on the new prime minister, but he has a tremendous challenge ahead.

Will Investors’ Gamble On Modi Pay Off?
Credit: Al Jazeera English via Flickr

Investors have punted billions of dollars on incoming Indian Prime Minister Narendra Modi and his promised reforms reviving Asia’s third-biggest economy. After securing Friday the nation’s biggest electoral victory in 30 years, can the Hindu nationalist deliver on his pledge of “toilets before temples?”

Writing in The Diplomat, Prof. Brahma Chellaney of the New Delhi-based Center for Policy Research said the landslide result achieved by the 63-year-old leader of the Bharatiya Janata Party (BJP) reflected Indians’ desire for a “dynamic, assertive leader” similar to Japan Prime Minister Shinzo Abe.

“Like Abe, Modi is expected to focus on reviving India’s economic fortunes while simultaneously bolstering its defenses and strengthening its strategic partnerships with likeminded states…The charismatic Modi – a darling of business leaders at home and abroad – has promised to restore rapid economic growth, saying there should be “no red tape, only red carpet” for investors,” he wrote.

According to Reuters, foreign investors have injected more than $16 billion into Indian bonds and stocks during the past six months and currently own more than 22 percent of Mumbai equities, at an estimated value of $280 billion. The value of Indian shares has increased by $371 billion since the BJP named the long-serving Gujarat chief minister as its leader.

The son of a tea seller, Modi’s success in attracting foreign investment to Gujarat has helped its per capita income nearly quadruple under his rule, and investors are hoping for more of the same after the nation’s economic growth recently slowed to its weakest pace in 10 years.

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News of Modi’s success in securing a parliamentary majority for the BJP-led National Democratic Coalition sent Indian stocks to a record high above 25,000 and the rupee to an 11-month high.

“We will be in a bull run for next three to five years,” Shishir Bajpai, a director at IIFL Wealth Management Ltd., told Bloomberg News. “We will look closely at shares of banks, utilities and industrials as they are likely to perform better.”

Speaking to supporters in his home state of Gujarat, Modi said: “I want to make the 21st century India’s century. It will take 10 years, not very long.”

With the World Bank already rating India the world’s third-largest economy in purchasing power parity terms, compared to its No. 12 rank in nominal terms, the foundations for a global economic powerhouse of 1.2 billion people appear to be in place.

Reform Wish List

In a May 15 research note, ANZ Research said Modi would likely put priority on restoring business confidence, including tackling stalled major projects, cutting red tape and pursuing fiscal consolidation.

For ANZ, some “low-hanging fruit” for the new BJP-led government included speeding up land acquisition and environmental approvals for investments such as the $12 billion steel project planned by South Korea’s Posco, sending the “right signal” to investors.

Other measures could include selling off more stakes in public sector companies, as well as further reform of fuel subsidies to improve government finances. Some “Modi-type moves” as developed in Gujarat might include cuts in red tape and streamlining of investment procedures, including for infrastructure and defense, the bank said.

However, ANZ said Modi’s government might also consider some “big bang” reforms, including addressing India’s “rigid labor laws” as well as opening up the coal sector to greater private ownership. Other changes could entail “strategic sales” in state-owned companies, as well as deregulation of subsidy prices, such as for urea, the nation’s most widely used fertilizer.

On Friday, ANZ senior economist Devika Mehndiratta said expectations would increase due to the size of Modi’s victory, with “few excuses for them to shirk away from implementing at least some ‘big bang’ reforms in the five-year term.”

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He wrote in a research note that the result “should give much-needed support to sluggish business sentiments. What will be key is for this win to be followed up with sound policy actions…A strong, stable government should help cement a gradual growth recovery (assuming El Nino behaves well), but inflation will likely be more challenging to tackle.”

Improved government finances could even spark a ratings upgrade according to Moody’s Investors Service, which currently has its lowest rating of Baa3 on India.

Yet while Modi’s BJP secured the biggest win by a single party since 1984, he will still need to negotiate with state governments over reforms to land use, electricity and water, according to HSBC’s Frederic Neumann.

A bullish Morgan Stanley said India’s economic growth could accelerate to 6.8 percent over the next two years, with inflation dropping toward the central bank’s target zone of 6 percent as it emerged from “stagflation.”

“The election outcome has only increased our confidence in our forecast that India is on course to achieve an average real GDP growth of 6.75 per cent over the next 10 years, taking its nominal GDP from $1.9 trillion to $5 trillion,” the bank said.

Yet with GDP currently running at 4.9 percent and inflation near 9 percent, Modi and his government still face a challenge to deliver the promised “glorious and prosperous” India. The nation’s job-hungry youth as well as foreign investors will be watching anxiously to ensure he delivers.