Here's The First Thing India's New Prime Minister Needs To Do
As Indian GDP growth slumped to a ten-year low, Modi won the 2014 general election framing his campaign on promises of better governance and economic growth.
Indian stocks have a had a good run up in recent months on expectations that Modi would come to power. India saw $3.5 billion in foreign direct investment (FDI) equity flows in March, up 41% from a year ago. His win also prompted many economists to raise their growth forecasts.
Once Modi gets his cabinet together, the pressure will be on for him to start delivering on his campaign promises.
CLSA analyst Mahesh Nandurkar identifies the first thing Modi should do.
"Accelerating project approval process will be a low hanging fruit," writes Nandurkar.
India has $150 billion worth of stalled projects in its pipeline as of March 2014. "Assuming even half of them were to get moving, then assuming a 4-5 year average execution period, same can add US$15-20bn to India's GDP," writes Nandurkar. "This will imply a c.75-100bps impact on GDP."
One of the key choke-points has been environmental clearance (EC). The average time takes for EC has climbed from 8 months in 2007, to 30 months now. Meanwhile, the approval rate has fallen from over 400 per quarter in 2007-2008 to 100 per quarter in 2012-2013, even as the flow of proposals has been steady. The government can also work to revive the public-private partnership (PPP) project award program.
"Rationalization of ministries and appointment of the right people (including technocrats) will likely accelerate this process," writes Nandurkar.
This chart from Morgan Stanley shows that projects under implementation has been declining.
Morgan Stanley
12 of 25 CEOs surveyed by Bloomberg ahead of the election results said reviving stalled projects should be the top focus. And seven of 11 economists surveyed said this should be the top task.There are other key reforms that analysts are expecting as well.
Modi will need to push reforms to drive manufacturing growth, develop infrastructure, reform the tax code through the goods and services tax (GST), drive an agricultural revolution through irrigation like he did in Gujarat, and federal reforms which give greater power to states and demand more accountability from them.
Of course, the 29-party National Democratic Alliance (NDA) of which Modi was just named leader has won 63% of seats in Lok Sabha (or the lower house) of Parliament, but only has 24% of seats in the Rajya Sabha (upper house).
Nandurkar writes that this means that over the next two years passing new bills won't be easy. But that the NDA should get more seats as members of the upper house slowly retire and new ones are elected by Members of the Legislative Assembly (MLA).