Modi Government’s economic record – Good days ahead
DEC 01, 2014
Narendra Modi-led BJP stormed the Lok Sabha elections bagging an absolute majority on its own in May 2014. Opinion polls, political pundits for a few months, had been predicting that Modi would become Prime Minister, but nobody was able to predict such a tremendous victory.
The economy was in a bad shape during UPA II regime; GDP growth rate had fallen (though impacted by global factors as well); scams in two of the main infrastructure sectors – telecom (2G) and coal block allocations – impacted sentiment and investments. Plus a general perception that the Manmohan Singh -led Government was indecisive, made things worse for Congress and the economy.
BJP has an investor / market / industry-friendly image and Modi’s track record in industrial development in Gujarat helped BJP come back to power.
1. Stock Markets – Markets are up and have given a big thumps up to the Modi Government. The markets (Sensex 30) are up by 18.5 per cent since the date of results announcement till date (28,334.63 as of November 21 vs 23,905.6 as of May 15, 2014). Brokerage houses like BAML have forecast Sensex will reach 54,000, HDFC to reach 45,000 in the next 2 years.
2. Inflation – The Consumer Price Index (CPI) which even the RBI has adopted ahead of Wholesale Price Inflation as the measure for inflation has reduced from 8.3 per cent in May 2014 to 6.5 per cent in September 2014. This is a record low since the index was launched in January 2012. Of course, fall in crude oil prices from $105/bbl in May 2014 levels to $85/bbl levels in September 2014 also helped ease the retail inflation.
3. Exchange rates – Rupee has weakened against the dollar since Modi took over from Rs 59.27/Dollar as of May 15, 2014 to Rs 61.89/Dollar as of November 21, 2014. Global factors have played a role here as well. This has been negated by drop in crude and gold prices which has helped keep our import bill under pressure.
4. FII and FDI Flows – Foreign direct and institutional flows have increased as investor sentiment improved and brokerage houses improved the rating of India. FDI flows averaged $1.3 billion per month during January-April 2014. From May to September, it has more than doubled, to $3.3 billion per month. FII flows during the same period have increased from $2.3 billion to $5 billion.
5. Credit Ratings – Standard and Poor’s upgraded the outlook from negative to stable while maintaining the rating at BBB reflects its view that India’s improved political setting offers a conducive environment for reforms. This is a major relief and change from its position last year when it said India faces a one-in-three chance of a downgrade. The uplift is likely to reduce cost of foreign currency borrowings for Indian corporates and boost investment flows. S&P also said that they could upgrade the rating if India reverts to a GDP growth rate of 5.5 per cent per annum and fiscal, external or inflation metrics improve.
6. GDP growth – Indian economy grew by 5.7 per cent in the first quarter of fiscal year 2014-2015 (April-June 2014) – the highest in ten quarters. While all of it may not be credited to Modi as he assumed office in mid-May, this is surely a sign of good things to come.
While leading indicators suggest a pick-up in the economy, a lot still needs to be done in terms of administrative barriers, infrastructure, tax regimes, labour market reforms etc.
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Suryakiran Tiwari runs a popular blog on Indian politics and elections at politicalbaaba.wordpress.com. Politicalbaaba has been nominated by The Guardian (UK) as one of the online voices providing an alternate view on India and the general elections. He also writes on social and economic issues. And a great friend !