With healthier economy, Modi can now do wonders

Stock markets are cheerful and the rupee is on an upward trend. Can he now propel economy to levels which the markets are dreaming of?

srishti

Srishti Pandey | May 16, 2014



The election results are almost out. And looking at the numbers and trends so far, one can safely say that the pro-development poll plank of the BJP has done the magic for the party which is headed for a simple majority. The markets celebrated it by rising over six percent to a record high, and the rupee touched an 11-month high of 58.63 to a dollar.

The markets and industry leaders are convinced that as Narendra Modi takes charge as the new prime minister, ache din aane waale hain for the country. Projects stuck in red-tape will now move ahead, decision-making will be quicker, investments will get a fresh boost and all this will add up to the economy bouncing back on the growth track – emulating the Gujarat model of development across the country, they believe.

But how significant will our economic growth be and how soon this will come is a little too early to predict. For now, let us just take a look at how good or bad is the situation at present when Modi takes over.

The markets and the rupee have overall been stable in the recent few months. In fact, since September last year, the Sensex gained above 25 percent, a feat which analysts attribute to the anointment of Modi as the BJP’s prime ministerial candidate. Experts argued that the markets were bouncing back on the bullish side in the hope of a strong and decisive leader of the likes of Modi coming to power.

It was around the same time that the rupee which had been subject to free fall over many months as it hit an all-time low of almost 69 to a dollar in August. The recovery of the currency came on the back of RBI’s interventionist measures, which included selling dollars, and Raghuram Rajan taking over as the new RBI chief.

Also, the UPA government in the last few months of the 2013-14 fiscal had taken various steps to rein in fiscal deficit by cutting down severely on the import of gold.

Since then both the markets and the currency have been doing well. According to a report in the Financial Times, foreign inflows worth $5.3 billion were injected into the Indian debt and equity market in March.

On multiple occasions, stock markets touched different highs as the rupee continued to appreciate to below 60 to a dollar.

While inflation levels continue to persist in the economy, the wholesale inflation toned down in April to 5.2 percent due to moderation in food prices. Retail inflation, however, continues to remain at a frightening level of 8.59 percent and the RBI’s tightening of monetary policy in the past have not done enough to bring these levels to a comfortable level of below five percent.

Also, with the likelihood of below-average monsoons this year, even the new government may face some difficulty in taming inflation.

Albeit marginally, the economy did witness some improvement as it registered a growth of 4.9 percent in 2013-14 up from 4.5 percent in 2012-13. And this gives Modi and his team a slightly better set of factor inputs on which they need to build a strong and robust economy.

Markets move on the basis of sentiments. The mere announcement of a pro-development leader has brought the BJP to power with a thumping majority. With this kind of sensitivity, Modi needs to give them strong enough reasons to remain cheerful.

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