The prospect of Prime Minister-designate Narendra Modi leading
India’s
most stable government in three decades has prompted economists to
raise growth forecasts in the world’s second-most populous nation.
Morgan
Stanley, Citigroup Inc. and Nomura Holdings Inc. see faster expansion
in the next few years on Modi’s plans to attract investment and build
more ports, roads and bridges.
Gross domestic product
will expand at a four-year high of 6.5 percent in the year through
March 2016, Morgan Stanley predicts, compared with a previous estimate
of 6.2 percent.
“The election results could be an inflection
point for India’s story,” said Chetan Ahya, Morgan Stanley’s Hong
Kong-based chief Asia economist. “The decisive election outcome suggests
the new government will be able to implement reforms at a faster than
previously expected pace.”
Modi’s win has sparked optimism that India’s economy will lead a rebound in the biggest
emerging markets, as
Russia grapples with Ukraine tensions and
China
contends with rising bad loans and slowing growth. Modi should use his
mandate to cut subsidies and increase spending on infrastructure to spur
private investment from a nine-year low, Ahya said.
Citigroup
and Nomura both raised their forecasts for India’s $1.8 trillion
economy, saying it will expand 6.5 percent in the 2016 financial year --
up from 6.2 percent and 5.7 percent, respectively. India will have
growth of 6.1 percent in fiscal 2016, according to a Bloomberg survey
published April 30, compared with China’s 7.25 percent,
Brazil’s 3.2 percent and Russia’s 2.5 percent.
Political Clarity
“With political clarity emerging, business and household confidence is likely to rise,” said
Sonal Varma, an economist at Nomura in Mumbai.
India’s economy
probably grew
4.9 percent in the year ended March 31, near the previous period’s 4.5
percent that was the slowest since 2003. The government and Reserve Bank
of India don’t have official growth forecasts for 2016.
Modi
will probably simplify approval and implementation policies for
infrastructure and industry, help companies improve their balance sheets
and boost bank’s capital, according to Morgan Stanley’s Ahya. The
policy overhaul will improve business sentiment and corporate profits,
incentivizing them to spend more, he added.
Investments by private companies fell to 9.2 percent of GDP in the year ended March 2013, the
lowest in data going back to 2005, according to estimates from the Ministry of Statistics and Programme Implementation.
Possible Roadblocks
Boosting
this and controlling Asia’s second-fastest inflation is crucial to spur
growth from near a decade low, according to Nomura.
The BJP-led
bloc won 336 of 543 seats up for grabs, more than the 272 required for a
majority. The party alone garnered 282, with the Congress getting 44
seats and smaller regional parties got 148.
While this
guarantees smoother progress for bills in the lower house, India’s
federal system means negotiating through the upper house and with
state governments may hobble efforts for faster implementation of key policies, according to Citigroup.
HSBC
Holdings Plc predicts that another roadblock might be presented by the
bureaucracy, which was rated the worst among 12 Asian economies tracked
by Political & Economic Risk Consultancy Ltd. in 2013. The BJP has
only 61 of the 245 members in the upper house, and forms governments in
just six of 28 Indian states.
Gradual Revival
“The revival will be investment-led but gradual,” said
Rohini Malkani, Citigroup’s Mumbai-based economist. “We are optimistic but believe the path will be more gradual than sharp.”
Risks
to economic growth emanate from the threat of higher interest rates if
El Nino weather effects damp farm output and stoke inflation, Malkani
said.
Lowering price pressures is crucial to boosting growth,
Reserve Bank of India Governor Raghuram Rajan reiterated this month. He
has raised the benchmark
repurchase rate
to 8 percent from 7.25 percent in September. The government must pursue
“fiscal discipline” and should create a more competitive corporate
environment, Rajan said in a speech in New Delhi yesterday.
Markets Rise
The
rupee rose in the offshore market today, with the one-month
non-deliverable forward gaining 0.1 percent to 59.01 per dollar as of
11:02 a.m. in
Singapore.
The
value of Indian equities has climbed by $412 billion, or 41 percent, to
$1.42 trillion since the BJP named Modi as its candidate for prime
minister on Sept. 13. That’s helped the country replace
Australia in the world’s top 10 stock markets.
Companies
likely to benefit the most from a revival in the economy, such as
infrastructure firms, have been the biggest gainers. That’s a turnaround
from the previous three years, when investors bought defensive shares,
such as makers of consumer goods and pharmaceuticals.
Sesa
Sterlite surged 7.9 percent yesterday and Tata Steel rose 3.6 percent to
a two-year high, sending a gauge of metalmakers to its highest level
since February 2012. Mahindra jumped the most in two weeks while
power-equipment maker Bharat Heavy Electricals Ltd. rallied to its
highest in more than two years.
“Faster decision-making and
reforms, along with prudent monetary policy, should gradually correct
India‘s macroeconomic imbalances,’’ said Nomura’s Varma. ‘‘Economic
fundamentals change slowly, but as they do, they should feed off each
other and unleash other positive indirect effects on the economy.’’
To contact the reporter on this story: Kartik Goyal in
Mumbai at
kgoyal@bloomberg.net
To contact the editors responsible for this story: Daniel Ten Kate at
dtenkate@bloomberg.net Jeanette Rodrigues, Dick Schumacher
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