US investors bullish, hope Modi will lead India’s economic rebirth

The BJP’s landslide victory on Friday cheered foreign investors hoping pro-business Narendra Modi would kick-start India’s stalled economy and usher in real change. They also expect Indian companies sitting on cash piles to put some of that money to work as the policy environment improves.

The Indian stock markets reached a record high on Friday after Modi was set to sweep the national poll, the clearest election success India has seen in 30 years. Analysts think more gains could follow and foreign equity investors have positioned themselves for further gains.

Gujarat now enjoys double-digit growth and there is no question that Modi has run an economically tight ship, but investors will now expect Modi to deliver on a national scale. The finance ministry was widely seen as going to the dark legal genius of the BJP, Arun Jaitley, who belongs to Modi’s small inner circle, but Jaitley has bombed in Amritsar. He lost by 90,000 votes to Congress rival Amarinder Singh.

After a dithering, divided and corrupt Congress, it is easy to understand why so many investors feel a need for bold change. India’s annual growth rate has sunk from a peak of 9.3 percent in the last quarter of 2010-2011 to 4.7 percent this year. The slowdown has become deeply entrenched and Modi will have his work cut out in fixing India’s mix of high inflation and low growth.

“Real change is critical in jump-starting a big and rising growth curve. I think foreign investors will be observers for a while in order to see if political rhetoric converts to real implementation. Mr Modi needs to think big and execute big and have the resolve to chip away the institutionalized corruption and other problems. The challenge is that it requires severely disrupting the way things have been done for decades,” Seth Freeman, CEO and chief investment officer at San Francisco-based EM Capital Management LLC, told Firstbiz.

“This brings me to the themes of trust and confidence. Investors and citizens need to see things get done and people held accountable. Investors are patient and the institutions have allocated to India. The only issue is what percentage. But, I really think the emphasis has to be redirected to getting domestic investors to participate in their own markets,” added Freeman, who advises foreign funds on implementing investments in India.

The complex task of rebuilding “trust and confidence” with bruised global companies will fall on Modi and was accentuated last week as two major foreign investors, British oil major BP and telecoms group Vodafone, began international arbitration appeals protesting against unfair treatment by the Indian government. Vodafone is hoping that the new Modi-led government will introduce legal changes, reversing former finance minister Pranab Mukherjee’s disingenuous tax amendment targeting the group, as part of a fresh attempt to rebuild ties with foreign investors.

Modi’s reputation for decisiveness, getting things done, rooting out corruption, stimulating investment and slashing through cumbersome regulations has also raised expectations among investors.

“Investors don’t like volatility in policy. That has been a major problem in the last few years under the UPA government. Indecision is the worst decision at the end of the day,” said Krishna K Gupta, founder of Massachusetts-headquartered Romulus Group.

“Narendra Modi has given the perception that he is not one to entertain volatility in policy. In Gujarat, he has been very clear — this is what I do and I don’t change things around. If that translates to the center, investors will love it. That’s why investors are so bullish about Modi. I am optimistic he can lead from the front, get regional interests in line, but what he will have to contend with on the national field is very different from what he has done in Gujarat,” added Gupta who still felt confident that Modi would break the “socialist mould” that India had been caught in for decades.

Since being voted back into office in 2009, Prime Minister Manmohan Singh has in effect halted the economic reforms that had initially made him so popular and retreated into a vast program of rural benefits and agricultural welfarism. The wholly unaffordable budget-busting handouts have led to subdued growth and in his budget presentation on 17 February, Finance Minister Palaniappan Chidambaram forecast the budget deficit at 4.6 percent of GDP this fiscal year.

The BJP will also need to deliver a budget that investors hope will be more realistic than the ones unveiled by the Congress party.

“I was watching the budget presentation from San Francisco and out of nowhere the Finance Minister stated that foreign investors will be retroactively assessed taxes and the sensational term "tax haven" was assigned to the jurisdiction from where a majority of foreign investment in India came from. A variety of rationales for GAAR, "round-tripping" and other prospective offences were promoted. There is still a lot of concern about GAAR,” said Freeman.

“This is an example of disjointed policy-making that does nothing but impede economic progress. There is a very simple solution, at least for US investors and that is for India and the US to amend the existing tax treaty to cover securities gains, like the US has with many other nations. Suddenly, Mauritius and Singapore entities would become obsolete. Investors don't mind paying taxes. We do mind having to pay twice. Certainty over tax-related issues would result in a wave of FDI,” he added

Meanwhile, US investment bank Morgan Stanley predicted this week that the Indian economy is likely to cross the $5 trillion mark by 2025, owing to the improvement in macroeconomic indicators and expected reforms.

“In our base case, we expect a steady pace of implementation of policy reforms, which will lay the foundations for the country's real GDP growth to move higher to an average of 6.75 percent over the next 10 years," said Morgan Stanley.

"If our projections were to come to fruition, the economy would pass the $5 trillion mark, a feat that has been achieved by only the US and China thus far, and would make India the fifth largest economy (from 10th currently) in the world," the report added.