India: Incredible Again?

Date: April 15, 2014

India: Incredible Again?

As the world’s largest democracy prepares to head to the polls, slivers of encouraging economic news have been mounting for India. With the business-friendly Bharatiya Janata Party (BJP) tipped to handily win the upcoming election, some analysts have begun to wonder if India is finally on the verge of putting its recent economic struggles into the rear-view mirror. Is India ready to once again to be “incredible”?  

Some signs indicate the answer could be yes. After roughly two years of disappointing results, the Indian stock market is flirting with all-time highs. And the Indian Rupee, one of the most heavily battered currencies during last summer’s tapering sell-off has started to rebound nicely, recently hitting an 8 month high.

Business sentiment seems to be buoyed by the hope that BJP prime ministerial candidate Narendra Modi will be able to work the same magic for the national economy as he did while serving as chief minister for the western state of Gujarat. Despite his paucity of formal economics training, Modi burnished his business credentials there by building sorely-needed infrastructure and cutting cumbersome red-tape.

The task facing any incoming government however, will not be an easy one. After roughly a decade of “emerging market super-stardom”, surging foreign direct investment, and double-digit growth rates, the India” rocket ship” began to return to earth over the past two years. Indeed, growth has been mired below 5%, the lowest rates seen in more than 10 years, and the slow-down in growth has been compounded by mounting inflation.

How did the India success story get side-tracked? In many respects, the current woes are simply the unfortunate by-product of policies necessitated by the Global Financial Crisis (GFC). As in so many other nations around the world, the dark days of the GFC forced the government to embark upon an aggressive fiscal and monetary stimulus program. While these measures did help to forestall a steeper contraction, they have predictably led to an unfortunate spurt in inflation, which the government now needs to tamp down through high interest rates. Not surprisingly, both investment and consumption have taken a heavy hit. At the same time, subdued growth in major export markets have slowed overseas shipments, exacerbating the current account deficit, and limiting the ability of the government to consider rate cuts.

Given this significantly more challenging macroeconomic environment, a series of underlying weaknesses in the Indian economy -- which were more easily overlooked during the high growth years -- have now become more apparent and have begun to exert a greater drag on the economy.  For better or for worse, double digit growth rates can camouflage a number of otherwise glaring shortcomings. Deficiencies in India’s infrastructure, excessive regulation, and a governing system which sometimes seems barely functional, are all in need of urgent redress. Reforms which could be conveniently delayed during the “go-go” years will now have to be tackled head-on if India’s economy is to once again reach escape velocity.

 Pre-election polls in India are not always the most reliable, so a fair amount of caution is advisable before anointing the BJP as victors. And even further caution should be exercised before anticipating a Modi-led business and economic renaissance. The challenges facing India are sufficiently entrenched so that any in-coming government – even the business-friendly BJP – cannot be expected to produce miracles overnight. The problems and weaknesses which have frustrated the current government’s attempts to revive the economy will not magically disappear, should Mr. Modi take the oath as Prime Minister.

What does seem clear however is a growing recognition of the need to address the fundamental weaknesses which were ignored in the past. While the proof will be in doing, returning confidence is helping to fuel a sober, but more optimistic outlook for India. 

Will India once again be “incredible”? It’s too early to tell. But the gradually building confidence does not appear to be entirely unwarranted. 

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