In­dia faces test to keep for­eign in­vestors

The Pak Banker - - MARKETS/SPORTS -

Nearly two years af­ter Naren­dra Modi was elected as In­dia's prime min­is­ter with an am­bi­tious busi­ness-friendly agenda, the fee­ble pace of re­forms is start­ing to test the pa­tience of one of his big­gest group of sup­port­ers: for­eign in­vestors. Long over­shad­owed by China's spec­tac­u­lar rise, Modi's pow­er­ful elec­toral man­date stirred hopes that In­dia fi­nally had a leader ca­pa­ble of boost­ing its un­der­whelm­ing in­vest­ment cli­mate and stolid global im­age.

How­ever, in a dis­ap­point­ingly rem­i­nis­cent nar­ra­tive of pre­vi­ous ad­min­is­tra­tions, par­ti­san pol­i­tics and a hos­tile op­po­si­tion have stalled Delhi's re­form push, in­clud­ing de­lays to leg­is­la­tion on an im­por­tant goods and ser­vices tax sought by busi­nesses ham­strung by ex­ist­ing, cum­ber­some levies.

For­eign in­vestors are show­ing their dis­plea­sure by head­ing for the exit, dump­ing a net $2.4 bil­lion in shares this year - the sec­ond­biggest out­flows in Asia ex­clud­ing China, ac­cord­ing to ex­change data around the re­gion.

A crit­i­cal test now awaits Modi on Mon­day when the govern­ment un­veils its bud­get for the year start­ing in April, giv­ing the prime min­is­ter an op­por­tu­nity to turn around views of the likes of Ser­gio Trigo Paz who said that In­dia and Mex­ico were no longer the dar­lings of for­eign in­vestors.

"Th­ese re­form sto­ries (Mex­ico and In­dia) have run their course, and if any­thing, they are look­ing pricey," said Paz, who is head of emerg­ing debt at Black­Rock in Lon­don.

"A lot of overly pos­i­tive ex­pec­ta­tions have been built. They need to reprice some­time, and that's what we will see." The num­bers tell the story. The NSE Nifty has slumped about 12 per­cent this year and around 24 per­cent from its record high of March last year, help­ing to send the ru­pee dan­ger­ously close to near an all-time low against the dol­lar.

Stock prices are now lower than they were in May 2014 when Modi swept to power with the big­gest elec­toral man­date in three decades with a prom­ise to de­liver jobs to mil­lions of youth and to trans­form In­dia as a mag­net for busi­ness. For­eign in­vestors have also turned sellers of In­dian debt with net out­flows at $833.5 mil­lion. That con­trasts with $54.6 bil­lion in debt and equity in­vest­ments over 2014 and 2015.

Af­ter ral­ly­ing over 2014 and 2015, the bench­mark 10-year bond has re­treated this year, send­ing its yield up around 11 ba­sis points to its high­est since late Au­gust.

Some of this sell­ing mir­rors a wider down­turn in global mar­kets but for­eign­ers are no doubt dis­il­lu­sioned with the slow pace of the much vaunted re­form process.

Mar­kets hope the govern­ment bud­get will steer spend­ing to­wards sec­tors such as in­fra­struc­ture, while re­duc­ing sub­si­dies to con­tain the fis­cal deficit. Yet Modi also faces a fraught do­mes­tic en­vi­ron­ment amid wide­spread doubts about the ac­cu­racy of data show­ing In­dia's econ­omy grew at 7.3 per­cent in the Oc­to­berDe­cem­ber quar­ter, higher than China.

Per­haps more saliently for in­vestors, Modi's fail­ure to de­liver on his prom­ises so far are also be­ing re­flected in earn­ings, which have failed to match ex­pec­ta­tions.

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