India’s economy rides the Modi bandwagon

India’s business community is optimistic that 2015 will be a year of prosperity with a new government at the helm. While low oil prices and inflation provide a boost, other challenges remain.

Workers assemble air conditioners inside the Daikin Industries plant in Rajasthan. Adnan Abidi / Reuters
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MUMBAI // Kasaragod Ullas Kamath has seen India’s economy go through highs and lows over the last few decades. The recent years have been the most challenging for India amid slowing economic growth and soaring inflation.

But Mr Kamath, the joint managing director of Jyothy Laboratories, a Mumbai-based manufacturer of household products, is optimistic that there is likely to be a desperately-needed improvement in India’s economy this year.

That view is shared by many corporate leaders and analysts, as the prime minister Narendra Modi’s government starts its first full year in office after sweeping to power last May on promises of boosting the economy with business-friendly policies.

“We’re very positive on India’s growth in 2015 as the leadership change on the government front will start showing up results from this year onwards,” says Mr Kamath.

Slumping oil prices and easing inflation are also creating ideal circumstances for an uptick in India’s economy.

“With inflation cooling down this year, middle class incomes are expected to rise, giving them more purchasing power for consumption and investment,” he adds.

But there are also a number of the hurdles as 2014 ended with a parliamentary logjam over legislation, forcing Mr Modi to pass emergency ordinances in areas such as easing land acquisition rules to kick-start investments in stalled projects.

“Execution, support from state governments, and changes at the ground level I am afraid are the biggest challenges for businesses and the economy,” says Mr Kamath.

India is recovering from its worst slowdown since the 1980s, as it emerges from two years of economic growth below 5 per cent. Much of this was blamed on the previous government’s inaction on major reforms needed to boost investment and create more jobs and improve infrastructure. It is widely agreed that the country needs growth levels of about 8 per cent to support its population of more than 1.2 billion.

The finance minister Arun Jaitley last month said he expects India to achieve a growth of 6 per cent to 6.5 per cent in the next financial year beginning in April, up from a predicted 5.5 per cent rise in GDP in the current financial year.

“India has a unique opportunity with prime minister Narendra Modi at the helm,” says R Ramakrishnan, the vice chairman, joint managing director and group chief executive of Polycab, India’s biggest manufacturer of cables and wires.

“A very positive sentiment prevails about the future economic prospects. The revival of investment climate, a possible easing of interest rates, improved manufacturing climate and growth in the industrial economies, are the key factors likely to boost growth in fiscal year 2015. All in all, one can say that happier days are close at hand.” He says reforms such as raising the cap on foreign investment in the insurance sector will help revive the economy.

Lower commodity prices are also favourable, given that the country depends heavily on oil imports.

Kiran Kumar Kavikondala, the director and chief executive of WealthRays Securities, points out that a rebound in oil prices would be negative for the country’s current account deficit. Gold is other major cost to India in terms of imports, with the precious metal being hugely popular among Indians.

“Gold imports if tightened would help maintain lower levels of current account deficit,” says Mr Kavikondala. “The Reserve Bank of India may cut interest rates in 2015 which is likely to boost core industry. Efficient coal block allocations are expected from the government, which is likely to boost output and help the power sector. Other reforms such as divestment in public banks and restructuring management structure will boost efficiency and improve non-performing asset stats for public sector banks. GDP growth is expected to pick up on back of these reforms.”

He says these factors would in turn have a positive effect on the stock markets, which are expected to test new highs this year.

The rupee has been trading at weak levels against the US dollar and could turn out to be another turbulent year for the currency.

“The Indian rupee is expected to face volatility in 2015,” says Mr Kavikondala. “But as the domestic inflationary pressure is reducing on the currency and RBI has strong dollar reserves and with a positive outlook on the Indian economy, the rupee is expected to outperform its peers. US may opt for normalisation in monetary policy on the back of improving growth and labour market. This poses a risk to rupee.”

This year’s union budget in late February will be closely watched for decisions made at the top to boost the country’s economy.

“The government is taking small steps towards fundamental changes,” says Sailesh Nathan, the regional director of the SME Chamber of India and the India International Trade Centre for the Middle East and Africa, the organisers and partners of the Maharashtra Economic Summit which takes place in Mumbai next Friday.

“Strategies such as public-private partnerships and tax holidays in the transport sector, providing custom duty relief to the energy sector, digitalising rural India, and building smart cities and metro infrastructure in some cities are expected to improve infrastructure. Once these policy changes start being reflected in action, they may have much more far-reaching positive and sustainable effects on the economy.”

There have also been steps to streamline administration and government processes, including the scrapping of the six-decade-old Soviet-style planning commission. This is being replaced with a think tank, which Mr Modi this month announced would be run by economist Arvind Panagariya, a professor at the Columbia University in New York. “A relatively light electoral calendar means that there is a window of opportunity over the next 12 months for the government to push ahead with much-needed but politically difficult reform,” analysts at Capital Economics wrote in a research not on Wednesday, adding that “there is unlikely to be a better opportunity” for the government to build on the momentum of its reform process.

Nikhil Kamath, the director of Zerodha, an online brokerage, says reducing interest rates and speeding up reforms could help turn around the economy this year. There are positive signs with Mr Modi’s government pushing for policy changes, but huge challenges remains, Mr Kamath adds.

“Corruption, poor infrastructure and rural poverty are some of the biggest challenges ahead of us,” he says. “The whale of a problem still remains the burgeoning population crisis.”

Mr Ramakrishnan also outlines a number of obstacles.

“India’s weak infrastructure manifested by its poor energy supply, unpaved roads, ineffective airports and ports, an ageing and unsafe railway system, and inadequate urban transportation pose challenges. “Providing jobs to rural youth, adequate education and imparting skills for employability, support for small entrepreneurs or the self-employment are the other issues crying for attention.”

But despite the magnitude of these issues, he is still upbeat on the outlook.

“There is more cause for optimism and confidence on the economic outlook for India, rather than pessimism and negativity.”

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