The incoming government that will rule India has its work cut out. Its economy is growing at its slowest pace in over a decade and there is frustration among the government’s constituents. They want change.
Early results, released an hour ago, show that the Bharatiya Janata Party (BJP) headed by Narendra Modi will win an absolute majority. This will give him a mandate, without hindrance, to launch his party’s agenda to reform India’s economy and financial system.
Over the course of the month, India saw a record number of voters turn out. Some 551 million people casted votes in the world’s largest democracy.
Where Should Modi Start First?
There are many issues to be addressed but four stand out that should get tackled first.
First of all, India is running an extremely high fiscal deficit. While it has narrowed over the last couple of years, it remains a concern. The deficit is expected to come in near 4.6 percent for 2013-2014 fiscal year which ended in March. This is down from 4.9 percent from the previous year. In 2012 to 2013 it was at 5.8 percent. Compare this to China’s deficit to GDP of 2.1 percent, you can see why this is a priority.
Whoever becomes the new finance minister, will face a sobering reality. The country has a stagnant revenue stream. India also has sticky expenditures which will make consolidation difficult to the say the least. If the new regime decides to expedite capital spending in order to produce a cyclical turn in the current investment cycle, then in the short term, we will see a problem with the debt to GDP ratio.
There Is Need to Improve the Business Climate
The second item on the agenda will be to improve the business climate. This should be the anchor of their agenda. Capital investments has been stunted by high borrowing costs. This causes delays in project approvals and an increase in debt levels for corporations. Modi did this for his home state in Gujarat and there are high hopes he can replicate that success in the national arena. We should expect that infrastructure and resource based industries will get the bulk of the attention.
However, the new government must approach a higher public spending with caution. The fiscal position is already adverse.
Keeping Inflation in Check is a Priority
Another area of concern is inflation. The incoming government must work closely with the central bank to keep inflation in check. They will need a low and stable inflation to help support and increase investments which will provide good visibility, costs and profitability. They will have to address the high price inflation of food by opening up its reserves for rice, wheat and cereal into the market.
The last area of major concern they government should address first is that current account deficit. They must keep narrowing this number, which is now less than two percent of GDP or keep it at this level. There is a risk it could widen back to three percent if gold imports shoot higher once the trade restrictions are lifted. It could also widen if the domestic investment cycle improves.
India has already implanted some measures. They have hiked the import duty, which has suppressed the demand for gold. This is one of the biggest contributors to India’s import bill. Modi and hid BJP Party will review current import duties on gold within its first three months in office.
Binary Options Take for the Day
Indian equities will be in play for the next few days. Same with the Indian Rupee and Gold. Might want to adjust your buy longs accordingly.