What are the implications of the new Modi-led Indian government for global investors?

Hopes are high, but what will the new government mean for sustainable investment?

Narendra Modi, sworn in at the start of this week as the Prime Minister of India, has made an incredible journey from tea boy to Chief Minister of Gujarat and on to become the 15th Prime Minister of India. Modi’s pro-business Bharatiya Janata Party (BJP) won a rarely seen absolute majority in the Indian parliament on 16th May, ending a decade of control by the Congress party. The outgoing government had been heavily criticized for stalled reforms along with high levels of corruption. By contrast, the state of Gujarat has achieved economic growth consistently above the national average since Modi took office as Chief Minister in 2001, creating the largest number of jobs in urban areas, implementing power reforms, cutting red tape and simplifying the number of clearances required to do business. Portraying himself as a decisive man of action, Modi campaigned for the premiership vowing to end administrative chaos, making the government apparatus efficient and creating millions of jobs.
Below, we highlight a few key implications Modi’s election might have on the economy and for (global) investors:
Indian economy
This huge victory means that India’s GDP growth rate is likely to improve. Some factors that have been historically impeding a higher growth rate included policies that created investment bottlenecks, non-execution of structural reforms and policies, and limited involvement of the manufacturing sector. In the past, multiple announced reforms and policies have not materialized as things moved slowly in India due to dysfunctional, centralised decision making. With the Chinese economy dwindling and global investors looking for an ‘alternate China’, India is well positioned to usher in a new set of reforms and a new growth model with the necessary impetus for the manufacturing sector. India is on the right side of the demographic curve and will be the largest supplier of labor to the world over the next decade. Additionally, if the government focuses on (as it has promised) the so-called low-hanging fruit in terms of structural reforms in areas of land, agriculture infrastructure, railways, water, mining and tax laws, then India is poised to reviveits growth aided with an outright majority government which would not have to rely on coalitions that has historically lead to the stalling of reforms.

Revival of pending projects
A sustainable economic recovery will be critically dependent on a revival in corporate investments. Policy driven sectors like manufacturing and agriculture will be key focus areas along with land acquisition issues and removing infrastructure bottlenecks. Over US$150bn worth of projects to upgrade the country’s infrastructure have largely stalled, and so building or policy-related sectors will be the ones for investors to watch. Data from the Centre for Monitoring Indian Economy shows that a record INR 6.26 trillion of projects were shelved, abandoned or stalled in fiscal year 2014. At least some of these projects have been held up because of issues such as land acquisition or environmental clearances. Getting at least some of these projects off the ground would provide a welcome boost to the economy. With continuous monitoring of execution of these reforms and the removal of archaic labor laws, the new government intends to revive policy driven sectors like banks, industrial and building materials, thus benefitting investors.
On a different note, the incoming government also represents an ‘excellent opportunity’ for pharmaceutical industries to strengthen and rekindle their relationships with India, according to a leading US industry body (The Pharmaceutical Research and Manufacturers of America). This has been demonstrated by the party’s mention of a strong intellectual property (IP) regime in order to ‘maximize the incentive for generation’, while also outlining a vision for a healthcare system that improves quality and access.
Relationship with Indian central bank
The party also looks set to have a good relationship with the Indian Central Bank, which will be critical for future monetary policy. According to market analysts, it is very positive that the BJP acknowledges the importance of the current governor of the Reserve Bank of India, Raghuram Rajan, who has helped to stabilize the economy since he took the job in September 2013.

Foreign investment inflows
Both foreign direct (FDI) and indirect (FII) are estimated to more than double and cross the US$60bn level this fiscal year as overseas investors re-find confidence in the Modi-led government reforms. This is much needed. From a peak of US$31bn in 2009, FDI inflows declined to US$19bn in 2011 as many companies were put off by the business unfriendly environment. Although it has rebounded to US$28bn, this is still a fraction of the U$125bn that China attracts.
The new government has its goals set to make India a less hostile country to do business in. One of the key solutions proposed by Modi has been to stop what he calls “tax terrorism”. Arun Jaitley, the new Finance Minister, has also been critical of the Congress-led administration’s imposition of retrospective taxes on foreign investors, something that many companies hope he will reverse. The Modi government has, however, reaffirmed its stand on FDI in multi-brand retail and indicated that foreign players will not be allowed to open mega stores in the country as it may adversely impact small traders and farmers.
Solar energy impetus
Modi pioneered India’s first incentives for large-scale solar power in 2009 as head of Gujarat state. He now intends to use solar power to bring electricity to the 400 million people in India who do not have access to electricity. The goal would be to use solar panels to allow every home to have power to run two bulbs, a solar cooker and a television by 2019. This will not only prove life-changing in terms of access to electricity but will also tremendously improve their health because burning biomass and coal for cooking and light creates a lot of dangerous indoor air pollution.
Budget 2014
The first budget of the Modi government will be a closely watched affair, not only by domestic investors but by the global credit rating agencies. Given the current poor public finance situation and high fiscal deficit, the finance minister Arun Jaitley will have the task of implementing reforms and dealing with an economy that is suffering from stagflation.
Poverty reduction
Although the current government has yet to articulate any precise strategic plans, one of the measures to boost the country’s GDP and economic turnaround would be poverty reduction, social security and employment generation.It will also be a big step-up in the direction of increasing the demand for goods in the economy. In this regards, it is hoped that this government will learn from the sustained high growth model that China pursued which led to a decline in its poverty ratio from 85% in the 1980s to less than 10% currently.
Concerns and conclusions
The Modi government also comes with concerns on communal harmony, the majority of which originated from his term in Gujarat that saw the 2002 Godhra riots. Although Modi was cleared by the Supreme Court of India, his allegiance to Hindu nationalist party, Rashtriya Swayamsevak Sangh (RSS), the parent organization of the BJP, still raises concerns on how neutral his governance will be. His critics (including Nobel Laureate Amartya Sen and writer and activist Arundhati Roy) raise concerns on his lopsided development model in Gujarat and what this government’s victory means to social and human development freedoms, especially for women, tribals and minorities. They also point to other social indicators like lagging education standards, lower life expectancy, poor healthcare, and global development challenges like climate change and environmentalists’ worries about speedy environmental clearances. Additionally, concerns regarding Modi’s choice of ministers and their portfolio allocations for obtaining the stated objective of ‘minimum government, maximum governance’ remain. For example, Prakash Javadekar has independent charge of information and broadcasting as well as environment and parliamentary affairs which may increase the burden on a single minister, meaning they have to rely excessively on bureaucrats. Another minister has joint responsibilities of coal, power and renewable energy which may lead to conflicts of interests. But for now, hopes are high that the new government will be looking to fulfil public expectations and put the Indian economy back on its feet. Taking on a legacy riddled with failed inclusive growth schemes, economic deficits, bureaucracy, shelved projects etc, is not going to be an easy task and certainly beyond what a single political party can deliver in one term. However, this government definitely brings a greater ability to execute, and – whether successful or not – will undoubtedly shift the global economy’s balance of power. “A leader is a dealer of hope,” wrote Napoleon Bonaparte and Modi has proven himself already on that count.

Joslyn Chittilapally is a Research Analyst with Solaron