As econ­omy soars Modi re­forms face big head­winds

The Pak Banker - - MARKETS/SPORTS -

When In­dian Prime Min­is­ter Naren­dra Modi swept into power in 2014, he did so with an am­bi­tious man­date to re­boot the econ­omy, stamp out cor­rup­tion and lure for­eign in­vest­ment by stream­lin­ing the coun­try's con­vo­luted reg­u­la­tory regime. The leader of the Bharatiya Janata Party won the elec­tion by the big­gest mar­gin in three decades, and it all seemed to her­ald a new era for Asia's third-big­gest econ­omy. Now, ap­proach­ing his sec­ond an­niver­sary as premier, Modi's re­form am­bi­tions are far from re­al­ized. On the plus side, In­dia has eclipsed China as the world's fastest­grow­ing ma­jor econ­omy with gross do­mes­tic prod­uct pro­jected to ex­pand 7.6 per­cent in the fis­cal year through March. Slump­ing oil prices have helped bring down in­fla­tion, im­prove cor­po­rate mar­gins and shore up the cur­rent and fis­cal ac­counts. Modi's open­ing of sec­tors such as railways and de­fense helped draw record for­eign di­rect in­vest­ment in 2015 dur­ing a pe­riod when in­vestors were flee­ing from emerg­ing mar­kets. Those in­flows have helped lift for­eign ex­change re­serves by $47 bil­lion since the end of March 2014 to $350 bil­lion at the end of De­cem­ber. That's enough to cover about eight months of im­ports, al­most triple the amount the In­ter­na­tional Mone­tary Fund con­sid­ers ad­e­quate.

"The most im­por­tant in­ter­na­tional step Modi has taken for the In­dian econ­omy has been his strong sig­nal that In­dia is open for in­ter­na­tional busi­ness," said Alyssa Ayres, a se­nior fel­low at the Coun­cil on For­eign Re­la­tions.

Red tape is be­ing cut. In­dia's rank­ing has im­proved in the World Bank's Ease of Do­ing Busi­ness index, and an Ernst & Young sur­vey found that more than twice as many se­nior global ex­ec­u­tives picked In­dia over China as their top in­vest­ment des­ti­na­tion over the next three years.

Modi also aims to turn the na­tion into a global man­u­fac­tur­ing hub. His "Make in In­dia" pro­gram and out­reach to global lead­ers has at­tracted $400 bil­lion-plus worth of overseas in­vest­ment com­mit­ments. If re­al­ized, that would be more in­com­ing in­vest­ment than what has come in dur­ing the past 14 years for which data is avail­able. The gov­ern­ment hopes to cre­ate 100 mil­lion new fac­tory jobs by 2022 and in­crease man­u­fac­tur­ing's share of the econ­omy to 25 per­cent by 2022 from about 18 per­cent when he took of­fice.

At the same time, other key as­pects of Modinomics have come up short. He has shied away from a prom­ise to make it eas­ier to ac­quire land and the op­po­si­tion Congress party has re­peat­edly blocked a goods-and-ser­vices tax aimed at creat­ing a sin­gle mar­ket among In­dia's 1.3 bil­lion peo­ple. His gov­ern­ment also kept in place pow­ers to retroac­tively tax com­pa­nies -- a headache for for­eign in­vestors -- and shelved ef­forts to make la­bor laws more flex­i­ble.

Ex­ports re­main weak and bad loans rose to a 14-year high by the end of Septem­ber, pre­sent­ing a po­ten­tial drag on growth as com­pany prof­its have lagged the pace of eco­nomic ex­pan­sion.

While a poll pub­lished last month put his ap­proval rat­ing at an en­vi­able 58 per­cent, Modi suf­fered a big set­back in Novem­ber when he lost key elec­tions in the third-most pop­u­lous, po­lit­i­cally-strate­gic and low-in­come state of Bi­har, prompt­ing him to fo­cus more on boost­ing farmer in­comes in his lat­est bud­get.

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