It’s no surprise that when the world’s largest democracy, India with a population of 1.2 billion people and economy valued at 4.962 trillion dollars, based on 2013 GDP figures, goes to the polls the world’s media sits up and pays close attention.
Whilst the outcome of the recent national elections in Indian was fairly predictable, based on local polls, which pointed to a land slide victory for the former tea merchant, Narendra Modi's Bharatiya Janata Party (BJP), nevertheless, the election would be a momentous occasion for the emerging economy, India. No other political party other than the Congress party had ruled the country for 18 of the 67 years, since its independence from Britain. The elections were a "genuinely revolutionary moment … a democratic asteroid," according to author and academic Sunil Khilnani, as reported in the Times of India.
Indeed, Modi's politically right leaning BJP party now controls around 340 of the 543 elected seats in parliament at the cost of the centre-left who had their representation squashed to just 40 seats, a historic low. With voter turnout at around 66.38 percent, up 3 percent in the 1984-85 elections, according to Hindustan Times, it becomes apparent that Modi BJP leading party has conceded power with a healthy legitimacy of its people. Moreover, the Indians have given their thumbs up to a pro business party and they appear to have shunned the political left.
Meanwhile, the herd instinct of the financial market has driven the Indian stock market to record highs and the local currency, the rupee has rallied since Modi’s election win.
Therefore, with all this in mind, a politically friendly business climate and buoyant Indian financial markets, a question worth pondering over is whether all this might be a catalyst for greater capital inflows to India.
Modi undoubtedly is keen on attracting inward investment to India, bearing in mind that capital investment accounts for nearly 35 percent to India's economy, which incidentally barely grew in the previous fiscal year that ended in March due to funding issues, thereby putting a spanner in the works of many infrastructure projects.
There are some pressing issues for Modi to deal with as soon as he puts his feet under the premier’s desk. For example, on the economic front India’s credit rating has been downgraded to a "BBB-minus", by the credit rating agency Standard & Poor, which has a negative outlook on its sovereign debt. The market is now anxiously waiting to see if Modi can prevent a further downgrade by the credit rating agency to junk status. The pivotal point will be in July when the new government will need to convince investors that it is serious about getting its budget deficit under control
But getting the deficit down to its target of 4.6 percent of gross domestic product (GDP) is by no means an easy feat. The previous administration, riddled with corruption scandals, has not left the state coffers in a healthy state. Moreover, the Indian economy is neither looking virile and relatively reliant on public funding. Public spending in the Indian economy accounts for 11 percent of GDP. So a cut in government spending could be a further dampener on the Indian economy as a sizable number of the electorates’ livelihoods are dependent, either directly or indirectly, on it. Austerity is not going to be an easy sell for the Modi, despite the leader’s landslide victory.
Also improving the state’s coffers from increased tax revenues is unlikely to materialize in a relatively fragile economy.
Moreover, India’s Reserve Bank is keen on tackling the inflation rate, which currently stands at 8.6 percent. Their inflation target is 7 per cent by January 2016. The implication here could be further interest rate hikes; already it has jacked up interest rates three times since last September. But higher interest rates could be a double blow for India’s businesses by increasing the cost of financing and servicing existing debt, but also it would appreciate
the rupee and make exports more expensive.
Then there are all these bad loans racked up, 100 billion USD to be precise, which are mainly associated with public infrastructure projects. This currently represents 10 percent of all loans and it is estimated to reach 14 percent of loans by March 2015, according to Fitch Ratings.
The trade deficit is another issue the new government may need to get to grips with. Indian has set a target of a 2 percent trade deficient of its GDP. Gold imports have contributed to a greater than desired trade deficit. The previous administration responded by slapping tariffs, duties onto gold, which then fuelled a black market in the precious metal. Modi has promised to abolish these duties on gold. While this may be good news for gold buyers, this could also exert downward pressure on the value of the rupee, which would not be favorable to investors.
Another potential black swan for investors could be the ongoing religious feud between the Hindu majority and the Muslim minority. Modi, a Hindu, may not be perceived by the alienated and in some cases discriminated Muslim population, representing 14 percent to be sympathetic towards Muslim issues. Many Indian Muslim distrust Modi, who has been allegedly linked with a police assassination squad, which targeted Muslims. If the Muslim minority population continues to feel alienated, they could be radicalized resulting in more attacks against western interests.
There are some clear distinctions between China and India’s economy. For one, China has a large trade surplus, whilst the later has a deficit. China’s GDP grow rate, albeit decelerating in growth, at 7.7 GDP in 2013. India’s GDP growth rate has been estimated at 4.7 percent. China’s population is ageing, India’s is relative young and maybe looking into the future confident and energized by their new leader, while China’s people continue to be repressed by the regime, cohurst into accepting inhumane working conditions. The protests continue in China-how long can the authorities repress a nation of 1.3 billion people.
Darren Winters
0 comments:
Post a Comment