PANORAMA India: Happy Birthday Mr Prime Minister

In May 2014, following 5 weeks of legislative elections, India’s Bharatiya Janata Party (BJP) leader – Narendra Modi – became Prime Minister. Elected without the need for allies, this is the country’s first noncoalition government for 25 years. Known to be pro-business, Mr Modi’s election has instilled hopes for reforms in a country where bureaucratic impediments and poor infrastructure have been constraining private and public investments for years. After only one year in power, the Modi administration has already initiated major measures, such as the Goods and Services Tax bill which is expected to boost growth and fiscal revenues, as well as increase the foreign direct investment ceiling in several sectors.

In 2015, India seems to be one the bright spot in the world’s economy and Coface expects the country’s GDP growth to reach 7.5%. But to what extent have Modi’s reforms contributed to the recent pickup in growth? To answer this question, we should first recap on the situation and context of the Indian economy when Mr Modi came to power. We will then review the major policy actions taken by the government so far and their impact on the economy, as well as the challenges that remain. Finally we will analyse sectorial issues, focussing on the sectors which are likely to benefit from the progress in the implementation of reforms – notably the infrastructure, steel and IT sectors.

NARENDRA MODI CAME TO POWER IN A CONTEXT OF FALTERING GROWTH

In May 2014, after 5 weeks of legislative elections, India’s Bharatiya Janata Party (BJP) leader, Narendra Modi, became Prime Minister. Without the need for allies, his party won 282 of the 543 seats at the Lok Sabha (Lower House of the Parliament). As Mr Modi, the former chief Minister of Gujarat, is known to be pro-business and market friendly, his election instilled many expectations - especially among foreign investors. The hope is that Mr Modi can transform his regional economic success in Gujarat into a national one

Narendra Modi came to power in a context of faltering growth. GDP growth lowered from an average of 7.4% in 2000-2011, to 5.3% in the fiscal year 2012/13 This deceleration was mainly due to supply constraints and, in particular, to very poor infrastructure. The slowing of the economy was also aggravated by the political paralysis which affected the former Congress government, led by Manmohan Singh as Prime Minister, for 10 years.

His government struggled to deliver the muchneeded reforms, especially those related to foreign direct investments and infrastructures. (Chart 1)

India was also suffering from macroeconomic concerns. The Indian rupee was the currency most under attack during the confidence crisis wave against emerging markets, observed in the summer of 2013. The country’s current account widened from -1.3% of GDP in 2007, to nearly -4.8% in 2012. Increasing energy bills (crude oil represented more than 33% of total imports in 2013) and the vivid appetite of Indians for gold (8% of imports in 2012, 6% in 2013), negatively affected the external balance. Moreover, the Consumer Price Index (CPI) index surged to 11% Year-on-Year (YoY) in March 2013. Finally, the budget deficit and public debt reached -7.4% and 65.4% of GDPrespectively. These levels were well above other emerging countries in 2014 where, according to IMF data, public deficit stood at 2.5% of GDP and public debt at 41.2% of GDP. (Chart 2)