Is India ready for Narendra Modi 'style' reforms?
Moneylife Digital Team 12 June 2014

According to Rabobank, the newly elected Modi government is most likely to push ahead with large numbers of stalled public sector projects, invite FDI in sectors like railways and bring major administrative reforms

There has been a dramatic transformation in India's prospects over the past 12 months, and particularly since the recent May election results. After receiving a strong mandate from voters, the newly elected Narendra Modi government can push ahead with a large number of public-sector projects that already have funds allocated but which have fallen into a 'development hell', invite foreign direct investment (FDI) in sectors like railways and bring major administrative reforms to tackle widespread bottle-necks and inefficiencies, says Rabobank in a report.


Even though India's GDP growth is sluggish and most private sector indicators are also weak, there still is room for optimism, feels Rabobank. According to the report, there are three major points that can shift the tide:


1. Mr Modi looks set to use his extensive knowledge of India's labyrinthine bureaucracy and administrative structures to push ahead with a large number of public-sector projects that already have funds allocated but which have fallen into what Hollywood refers to as 'development hell'. Official estimates are that 303 such projects in sectors ranging from power, petroleum, industry, coal, shipping, mining, railways, chemicals, roads and steel, all of which are ready to go but are still waiting for an official sign-off, total a massive $116.9 billion. Given that India's total gross fixed capital formation in Q1 2014 from the public and private sector combined was just $140.5 billion, that means there is likely to be a significant lift to investment growth over the next few quarters as these projects are finally rolled out.


2. FDI would be encouraged in a wider variety of sectors, including India's vast railway network.


3. Significantly, and partly due to the lack of a majority in the upper house, Mr Modi has underlined his determination to push ahead with major administrative reforms to tackle widespread bottle-necks and inefficiencies. In short, there is a great deal of 'low hanging fruit' that India can easily pluck to generate substantially higher growth, though the prime minister has stressed what a mammoth task the overall restructuring of the economy will be and argues it will need two full terms to make a serious start on it.


The impact of the recent election is potentially huge and the underlying optimism was evident. "However, " Rabobank said, "in the background there has also been a marked improvement in some of India's key macro-fundamentals that deserves equal attention. In particular, the previously problematic balance of payments (BoP) has shown a huge turnaround in the past two quarters. Whereas in Q4 2012, the current account deficit (CAD) was equal to a worrying 7.0% of the GDP (a flashing red light for Indian Rupee in retrospect), as of Q1 2014, this had narrowed back to just 0.3% as the trade deficit has shrunk from over 11% of GDP to only around 6%."


India's overall BoP has also moved back into significant surplus for two consecutive quarters. Rabobank said, "True, there are perhaps still issues on the 'quality' of those capital inflows. In particular, there is arguably still not enough direct investment in that mix, net foreign direct investment (FDI) was very low in Q1 at just $901 million, even though actual inward FDI hit a nominal high of $9,781 million. However, portfolio investment has certainly picked up again, especially into debt securities, while net deposits from non-resident Indian (NRIs), while well below the surge seen in Q4 2013, are a further useful source of capital."


"Overall, that transition in the BOP is a huge positive for Indian Rupee and by extension will the current account withstand any liberalisation of the current restrictions on gold imports remains to be seen," the report added.


However, Rabobank says not to expect a sudden fiscal or monetary poicy shift from the Narendra Modi government to support meagre GDP growth. It said, "Importantly, the Modi government is aware that it needs to narrow the persistent fiscal deficit in order to keep public-sector debt under control, a gradual decline in the deficit is the most likely path ahead rather than a surge in state-spending. At the same time, the Reserve Bank of India (RBI) is de facto shifting its focus towards consumer price index (CPI) as a policy target, given persistent upward pressure on inflation from supply side shocks to food prices, which implies that the reverse repo-repo rate corridor will remain at 7.0% to 8.0% for some time ahead, even if the next move is more likely to be down than up."


"The unchanged outlook for Indian rupee over the next 12 months may appear uninspiring, but there is a lot happening behind the scenes. Indeed, Indian Rupee itself may not move outside of a 59-60 band but India's forex reserves are likely to increase significantly," says Rabobank in the report.


The report says, RBI on its part is likely to use the present window of opportunity on BoP to build India's forex reserves, which have been essentially flat for too long and hence have declined in terms of their coverage of both the overall import bill and external debt servicing obligations.

8 years ago
I wanted to send a registered letter to a government official. Since it was urgent I went to the post office that is functioning in the adjacent building where the government office was working. I have asked the post office clerk whether the letter would be delivered by evening. He said "No, Sir. The letter has to go to the head post office and come back and then only it will be delivered to the addressee" !!!!!
And this is the India our great Congress has built over a period of 65 years of their......... misrule !!.
8 years ago
The biggest challenge is the lack of work culture especially of the lower government staff, teachers, and of local bodies.
They do not work and their jobs being politically and legally protected, do not allow others to work. They have become uncaring parasites on the society.
Unless this 1000 kg gorilla in the room is taken care of, all attempts to improve government functioning will fail.
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