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Global Top Cat

Taking Stock of India’s New Prime Minister

By Yiannis G. Mostrous, on Jun. 19, 2014


India has a new prime minister after a month-long election that attracted a turnout rate of 66.4 percent and 136 million first-time voters.

Narendra Modi, the chief minister of Gujarat for 12 years, won the popular vote.

Modi hails from a segment of the population that India’s government identifies as other backward class (OBC), a caste that traditionally has been educationally and socially disadvantaged.

Prior to his election, the secular establishment and chattering classes viewed Modi as unelectable, a divisive figure who lacked national appeal.

Not only was Modi refused entry visas by the US and other high profile democracies, but his opponents also vilified him, likening him to a ruthless autocrat.

Nevertheless, Modi guided the Bharatiya Janata Party (BJP) to a landslide victory.

All told, the BJP won an unprecedented 282 of the 543 seats in India’s parliament, eclipsing the 244 obtained by P.V. Naraimha Rao’s Congress Party in 1991.

India’s bureaucracy is large, convoluted, and corrupt. The country’s weak central government has enabled the powerful chief ministers of individual states to impede national reform initiatives in the name of local politics.

Given these political realities, Modi will need to form a strong central government to implement the changes necessary for India to maximize its economic potential.

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Economic Situation

India’s economy appears to have bottomed, with gross domestic product (GDP) growing 4.5 percent last year and the Bloomberg consensus estimate calling for a 4.7 percent expansion in activity in 2014.

Despite this anticipated improvement, this growth rate remains well off the 9.6 percent expansion in GDP that occurred in 2007.

A decline in investment has weighed on India’s economic growth. The ratio of the country’s annualized gross fixed capital formation to nominal GDP has tumbled from a peak of 33.3 percent in 2008 to 28.8 percent–the lowest level in almost a decade.

India will need a new investment cycle to rejuvenate the economy in the short term; taking a cue from policies established during his tenure as Gujarat’s chief minister, Modi has outlined a pro-business program that would create jobs by encouraging corporate investment.

But this growth won’t be sustainable without radical social changes and structural economic reforms. Items on the agenda include:

  • Modifications to the labor market;
  • Efforts to foster entrepreneurship;
  • Greater public investment in agriculture and infrastructure;
  • A drastic reduction in bureaucratic red tape; and
  • A rollout of technology to improve operational efficiencies.

The size and complexity of this task cannot be understated. But it’s not all doom and gloom in India.

The consumer price index, the Reserve Bank of India’s preferred measure of inflation, dropped from 11.2 percent in November 2013 to 8.3 percent in March 2014.

India’s central bank has struggled to combat inflation in recent years, with insufficient infrastructure exacerbating supply constraints and pushing up consumer prices–a perennial problem that underscores the importance of ongoing investment in the nation’s transportation systems.

Meanwhile, the rupee has benefited from India’s improving current account balance, which narrowed to a deficit of 0.9 percent of GDP (US$4.2 billion) in the final three months of 2013 from 4.9 percent (US$21.8 billion) in last year’s second quarter.

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Assembling the Modi Squad

Modi is an outsider to Delhi’s political circles, which should strike fear into insiders. At the same time, the new prime minister has earned a reputation for decisive action–not one of the political center’s strong points.

Many of Modi’s closest aides likely will exhibit a pro-business bent and come from the staff that helped him run Gujarat’s government.

Putting the right personnel in the right positions will be Modi’s biggest challenge, especially with plans to consolidate and simplify governmental operations. For example, India has discrete ministries for coal, petroleum and natural gas could be folded into a single ministry of energy.

Big questions also remain regarding the chain of command within a slimmed-down government and how the vested interests will react to a drastic overhaul.

On the plus side, Modi should have fewer favors to grant relative to previous prime ministers who came up through the political establishment.

Our View

More so than any of his predecessors, Modi has a chance to initiate structural changes to India’s struggling economy. In particular, the new prime minister’s political acumen–especially at the state level—will serve him well in implementing his reform program. 

Modi also enters office with a clear mandate from India’s notoriously fragmented and erratic electorate; the country appears ready for a strong central government after 25 years, primarily because of Nerandra Modi’s political brand.

Without Modi, the BJP’s old guard–as corrupt and incompetent as the Congress party–would never have posted such an impressive electoral victory.

Nevertheless, these changes won’t happen overnight, and the new prime minister won’t have the answer to every problem.

Taking Stock

The Modi-induced rally that has occurred since last August has pushed valuations on the Bombay Stock Exchange ahead of earnings growth.

Still, any sign of renewed investment and credit growth could translate into another leg higher for India’s stock market.

Yiannis G. Mostrous contributes his expertise in emerging markets and international equities to Capitalist Times in his Global Top Cat columns.

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