Elections could be make-or-break event for India
A stable government could reinvigorate animal spirits, ease business uncertainty and address the supply bottlenecks, which could swing investor sentiment significantly in favour of India. A hotchpotch coalition government, however, would diminish prospects of reviving potential growth and risk significant capital outflows, it says.
Nomura's analysts say there's 50 per cent probability that the BJP's Prime Ministerial candidate Narendra Modi would be able to pursue reforms, cut red tape and boost investment in infrastructure.
The expectation of a Modi-led government has attracted overseas investors into Indian stock markets. The Sensex and Nifty have rallied to record highs this week, while the rupee has jumped to near 7-month high despite global headwinds such as the geopolitical standoff in Ukraine, fears of slowdown in China and tapering of monetary stimulus by the US.
Private sector investment in India has fallen consistently since 2007, first because of the global economic crisis (2008-09) and the subsequent expansionary fiscal policies of the government. The sharp slowdown means India has witnessed sub-5 per cent GDP growth over the previous five quarters.
Nomura says a Modi-led government could result in the following big changes in the medium term,
1) Business confidence will be boosted and there will be a revival in the capex cycle by 'de-bottlenecking' existing investment projects, which are stuck because of a lack of policy clearances. Fresh investment could be announced over time.
2) Fiscal consolidation backed by fiscal reforms such as the Goods and Service tax and rationalization of misdirected subsidies will help crowd-in private investments. It would remove the threat of rating downgrade that has been hanging over India for the past two years.
3) Lower inflation over time would increase real disposable income and boost financial savings, increasing the economy's ability to finance its investment needs.
Nomura expects the rupee to rise below 60 per dollar by June 2014 if a strong government comes to power post elections. It maintained its end-December Sensex target of 24,700. In the long term, Nomura expects the Indian economy to grow above 6 per cent in 2016, from an average of 4.7 per cent in 2013-14. more