The NaMo effect? India at crossroads after the landslide victory of the Nationalists
I was going back to Delhi for the first time since the election of Narendra Modi as the Prime Minister. It was an opportunity to discuss with the French business community in India’s capital and get a view of what we can expect from this coming to power, the like of which has not been seen since 1984.
This has not happened for 30 years! A man, “NaMo” as people call him here, has authoritatively presented himself as a true leader and taken charge of a country that has accumulated all deficits on the economic front today.
Having gained an absolute majority, he could govern without having to deal with regional parties. He will try to especially meet the strong expectations of a society that is frustrated by weak growth (less than 5%) and overall corruption that have not allowed India to become the economic power that its people, especially the 100 million new voters, were hoping it to be.
One single watchword that comes out from the Modi discourse is “Development”. Three sectors as a priority are going to benefit from Modi’s drive to revive the economy: Infrastructure, Power and Manufacturing. A three-pronged strategy is going to shape the plan of action: fight against inflation (which is still at 8.5%), the lowering of deficits (public and current balance) and the overall improvement of the business environment.
We have seen in the past few weeks that the markets have already responded favorably to the coming of power of Modi as the Prime Minister. The SENSEX (India’s CAC 40) has gained more than 25% since the beginning of the election campaign, the Indian Rupee is stronger with a forecast of an exchange rate of INR 55 for I US$ by the end of 2014.
There is then the thorny question of FDI (Foreign Direct Investment in Indian companies). The election manifesto of the BJP, Modi’s party that is now in power, has been quite clear on this topic. Foreign investment shall be encouraged in manufacturing and certain niche sectors but not in Services (e.g. insurance). In an effort to reduce inflation, FDI may also be encouraged in certain basic products which constitute up to 40% of the basket of goods of the average Indian household.
Other sectors, such as for example e-commerce, shall be addressed on a case to case basis, with intense pressure from key players in this sector who may risk their survival as they are still evolving businesses. Many developments (acquisitions, new funds deployments) in the past weeks are a proof of this. This opening up to FDI in certain sectors may nevertheless be inevitable considering that India in particular and the Indian subcontinent in general (SAARC) is today one of the regions in the world that are least open in matters of trade.
Modi’s success in the elections may possibly result in his bringing into place strong governance that will enable him to retain control over the most important issues and accelerate the decision making process. The initial signals being sent to Indians and foreigners are mostly in this direction. The coming weeks and months will tell us if this trend shall prevail.
Loic Lecomte | Senior Consultant – Arsha Consulting