Modi win engenders hopes for sluggish economy

NEW DELHI Thu May 29, 2014 5:25pm IST

Labourers are silhouetted against the setting sun as they work at a road construction site in Greater Noida on the outskirts of New Delhi August 15, 2012. REUTERS/Parivartan Sharma/Files

Labourers are silhouetted against the setting sun as they work at a road construction site in Greater Noida on the outskirts of New Delhi August 15, 2012.

Credit: Reuters/Parivartan Sharma/Files

Related Topics

Stocks

   
Border Security Force (BSF) soldiers ride their camels as they rehearse for the "Beating the Retreat" ceremony in New Delhi January 27, 2015. REUTERS/Ahmad Masood

"Beating The Retreat" Rehearsals

Rehearsals are on for "Beating the Retreat" ceremony which symbolises retreat after a day on the battlefield, and marks the official end of the Republic Day celebrations.  Slideshow 

NEW DELHI (Reuters) - India's economy probably showed few signs of recovery in the March quarter, but Narendra Modi's thumping victory in the recent general election has raised hopes of an investment-led turnaround in the coming quarters.

A Reuters poll of 48 economists predicts no clear improvement in Asia's third-largest economy, which is likely to have grown by 4.8 percent from a year earlier, a tad better than 4.7 percent in the quarter to end-December. The GDP data is due at 5:30 p.m. on Friday.

If the forecast materialises, it would mark a second straight fiscal year of sub-5 percent growth - the worst slowdown in more than a quarter of a century.

Modi won India's first outright parliamentary majority in three decades with a pledge to boost growth and create jobs, raising hopes among investors for a turnaround led by spending on infrastructure.

Ninety-three percent of CEOs in a polled carried out by one of India's industry chambers FICCI said they expect a substantial improvement in the near-term economic situation following the election of a strong government.

"As soon as investors see first signals of growth-supportive policies, you will see a definite turnaround on the ground," said Adi Godrej, chairman of Godrej group, a conglomerate with annual sales of $4 billion.

Godrej hopes that growth will pick up to 8 percent within two years. At the current rate, the Indian economy cannot generate enough jobs to employ the 10 million young people who enter its workforce every year.

GRIDLOCKED

Capital investment contributes nearly 35 percent to India's economy, but it probably barely grew in the fiscal year that ended in March.

Projects worth 6.2 trillion rupees ($105 billion) were shelved last year due to bureaucratic gridlock, according to CMIE, an economic think tank, the highest in the past 18 years.

Modi's reputation, assiduously built while running Gujarat, of speeding up implementation of infrastructure projects and promoting manufacturing has raised hopes of a similar push at the national level.

Arvind Panagariya, an economics professor at New York's Columbia University who is tipped to get an advisory role in the government, has called on the new administration to revamp the cumbersome tax regime and boost capital spending.

But that's easier said than done. States wield much of the power in approving projects, while only a quarter of approvals come from central agencies. High corporate leverage and rising bad loans at banks are also weighing on investments.

Stressed loans in India - those categorised as bad and restructured - total $100 billion, or about 10 percent of all loans. The debt-equity ratio of Indian firms, meanwhile, has hit a two-decade high of 97.9 percent, according to Nomura.

"Investor sentiment has changed but government needs to follow it up with action to address structural bottlenecks," says M.S. Unnikrishnan, managing director at capital goods maker Thermax (THMX.NS), who expects a gradual recovery.

Short-term steps to boost activity could also raise concerns about the new government's commitment to fiscal deficit reduction.

Adding to the growth challenge is an adverse global economic climate that is hemming in the country's exports growth. The sector accounts for nearly a quarter of the domestic economy.

Equally worrisome are the prospects of below-average monsoon rains this summer, which could hit farm output and fuel inflation. That would make it tougher for an inflation-focused central bank to lower interest rates to support growth.

EXUBERANCE

Hopes of an economic revival have attracted copious capital inflows, triggering a rally in the country's financial markets.

For some ebullient investors, this is the beginning of the strongest bull market. The BSE Sensex is already the best performing equity index in Asia this year. The rupee, too, has hit an 11-month high to the dollar.

Such is the euphoria that Jim O'Neill, who had once called India the biggest disappointment among the BRIC economies, is asking the South Asian nation to be labelled as one of the 'fabulous five' economies instead of the 'fragile five'.

O'Neill coined the term BRIC in December 2001 to jointly describe the four biggest developing economies - Brazil, Russia, India and China.

The 'fragile' tag came into vogue when the most vulnerable emerging markets were roiled by capital outflows from May to September last year after the U.S. Federal Reserve hinted it would wind down its monetary stimulus.

Unnikrishnan of Thermax, cautions against such "irrational" exuberance. "A child is born. It is expected he will do well and earn good money," he says. "But he is not going to earn money today."

($1 = 58.8750 rupees)

(Reporting by Rajesh Kumar Singh; Editing by Douglas Busvine and Jacqueline Wong)

FILED UNDER:
Photo

After wave of QE, onus shifts to leaders to boost economy

DAVOS, Switzerland - Central banks have done their best to rescue the world economy by printing money and politicians must now act fast to enact structural reforms and pro-investment policies to boost growth, central bankers said on Saturday.

Reuters Showcase

Vodafone Ruling

Vodafone Ruling

Government will not appeal Vodafone tax ruling   Full Article 

Indian Railways

Indian Railways

Private refiners compete with state firm to sell diesel to railways   Full Article 

Ranbaxy Results

Ranbaxy Results

Dec-quarter net loss widens on forex loss  Full Article 

Market Eye

Market Eye

Sensex, Nifty retreat from record highs on profit-taking.  Full Article 

Tech Talk

Tech Talk

Apple takes high road in China smartphone standoff with Xiaomi.  Full Article 

Business Strategy

Business Strategy

Uber scraps commissions for its New Delhi taxis.  Full Article 

Job Cuts

Job Cuts

Sony to cut 1,000 jobs in smartphone business - sources.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage