Prime Minister Narendra Modi’s government has shown great resolve in trying to tackle problems faced by the Indian economy in its first year in office

Giovanni Puglisi

June 15, 2015: Since the election one year ago, Indian Prime Minister Narendra Modi has energetically toured the world meeting foreign political and business leaders, promoting his government as more friendly and welcoming towards investors than in the past, while urging global manufacturers to “Make in India”.  However, despite unquestionably improving his personal standing thanks to his foreign travels, he has arguably failed to meet the high expectations he had created. To better understand what has been achieved and what remains to be done, IFM spoke to Parag Pai*, Funds Manager and former VP Credit & Research at Mizuho Bank in Mumbai.

Is greater macroeconomic stability a mere result of declining oil prices or Modi’s upper-hand on the economy?

Tumbling oil prices have obviously helped strengthen India’s economy and external finances, especially considering that India imports over 80% of its oil needs. While oil has bounced back from sub $50 per barrel levels to around $62 per barrel, the expectation is that prices would continue to be subdued over the medium term at least, which certainly bodes well for India.

While one year is too short a time to assess the contribution or rather the impact of Modi’s government on India’s economy, there is absolutely no doubt that the government has taken all the right decisions and has done whatever possible to put the economy right back on the superior growth path it was about a few years ago. Most importantly, the government has shown great resolve in trying to tackle problems faced by the economy and provide the right atmosphere for investment and growth. So yes, the Modi government certainly deserves due credit for restoring confidence in the Indian economy while the actual results would only be seen over a period of time.

Despite the “Make in India” program, the country seems still far from becoming a global manufacturing hub and investor sentiment has dampened considerably. Is it due to the limited liberalisation of the labour market?

“Make in India” is probably the most ambitious campaign that the Modi government has introduced ever since its inception a year ago. It’s important to note that this campaign has just begun and has been launched with a very long term point of view. And, also considering the might of China in manufacturing, India is sure to face enormous hurdles to make this campaign successful over the next few years. One year is a very short time to assess and, therefore, we need to revisit the progress of this campaign, probably in another year’s time.

Tax reforms are still embroiled in political wrangling, shall we expect further delays on much needed fiscal adjustments?  

As far as tax reforms are concerned, the Goods and Services Tax bill which seeks to do away with various indirect taxes is the most important legislation that the government had been trying to push through and this effort is really commendable. This is exactly the point to be noted here again, the government’s strong resolve in bringing about “changes”. Though the government has been able to pass the bill in the Lower House where the government has a strong majority, the bill still needs to be passed by the Upper House where the opposition has a majority, before it becomes law. There is a very important point to note here. Despite Modi’s government commanding a strong majority in the Lower House, it still faces stiff opposition to pass important legislations. Another case in point is the Land Acquisition Bill in which case too it has faced strong resistance from the Congress and other opposition parties. This basically raises a big question on the usefulness of the strong majority of the Modi government in the Lower house to which it was elected with much fanfare and tremendous public support last year.

Foreign institutional investment is on hold as privatisation of major public sector giants is yet slow. What’s the future prospect? 

Foreign institutional investors (Flls) have been on the exit mode in India since the last couple of months. The economy and ultimately corporate earnings have grown at a much lesser rate than expected and this has been one of the most important reasons why the flow of foreign capital has been lower compared to the previous years. Add to this, the issue of Minimum Alternate Tax (MAT) has been worrying FIIs of late. I expect the MAT issue to be tackled in a positive manner by the government and FIIs to return back to the Indian markets once corporate earnings pick-up. As of now, the consensus is that the second half of the current fiscal would be the starting point for earnings to look up again. Divestment of public sector units is also expected to pick up pace as the government has been trying hard to push this process, so it’s only a matter of time.

The country has yet many inefficient state-run banks with a pile of bad loans, which constrains them as opposed to their private counterparts. Are there signs of improvement and is the worst over?

As we have seen even in the current earnings season, i.e. for Q1 in 2015, quality of assets, especially of the state-owned banks, have not seen any major improvement. It has been a legacy issue which the banks will face even in the future owing to their lending policies and commitments, due to their typical public sector nature. While on the other hand, their private counterparts do not face any strict “do and don’ts” while lending, and they would only provide credit based on the creditworthiness of their clients.

Cities are badly in need of renewal and still lack essential infrastructures, including roads, mobile-phone and power transmission networks. Is the current budget allocation sufficient or rather paltry?

In India, as far as infrastructure development is concerned, paucity of funds and other resources have not been as important an issue as much as the implementation of the various five-year plans, and all previous ones have missed their targets by a big margin and the key reason has been lack of political will and implementation. Funding and resource allocation have been smaller problems. However, the Modi government dismantled the Planning Commission and has put in place another body to take forward planned infrastructure development, which has been hailed as a very reformative and positive step forward.

 

*Mr Parag Pai is a Senior Financial Analyst, Equity Investor & Funds Manager with 20 years’ related experience in the banking industry. He has previously held positions of Vice President Credit & Research at Mizuho Bank and Operations Manager at Bank of America in Mumbai.

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