With Bharatiya Janata Party’s Narendra Modi set to lead the next government at the Centre, experts today said the new Prime Minister should focus on taming inflation and boosting the industrial sector to revive growth.
Global financial services majors HSBC and RBS today listed priorities for the Prime Minister as counting trends showed victory for the BJP-led National Democratic Alliance.
The government should focus on growth, inflation management, fiscal policy and relationship with the Reserve Bank of India, according to RBS.
Besides, the focus should be on boosting infrastructure amid weak global demand, policy uncertainty and persistent legislative paralysis adversely affecting the industrial sector.
“The first and immediate policy priority of the new administration should therefore be reviving the industrial sector,” Royal Bank of Scotland (RBS) Head of Economics Research Asia Pacific Sanjay Mathur said.
HSBC said it expects investment projects to be rolled out faster, which would help gradually de-bottleneck the economy.
Besides, experts say Modi should simplify tax structures to ensure better compliance and also introduce the Goods and Services Tax.
According to them, there is a need for “reduction in subsidies”, which have widened the fiscal deficit and limited room to spend on investment schemes.
“We hope for a reduction in subsidies primarily via a deregulation of fuel prices – this would free up resources for development spending and human capital, a prime component of the BJP’s economic manifesto,” Mathur said.
A strong mandate would give the government political muscle to take the structural reform agenda forward. Even so, “it will take time and the economic recovery will, therefore, likely prove protracted,” HSBC said.
Listing out tasks in the infrastructure sector, Mathur said, “Priorities should be timely implementation of the Delhi-Mumbai Industrial Corridor, sector-specific policies for export-oriented SMEs and enacting a more investor-friendly land acquisition bill.”
Leading stock exchange BSE’s Managing Director and Chief Executive Officer Ashishkumar Chauhan said, “We will continue to work with the government constructively in implementing ways and means to provide additional funding to small and large companies in India to kick off investment cycle again and create additional jobs.”
Recording its best showing in its 34-year existence, Narendra Modi’s BJP on its own was leading in 276 seats, which is past the half-way mark in the 543-member Lok Sabha.
“The strong mandate will allow the new government to move forward with reforms, but we think the change will take time and the economic recovery is likely to be protracted,” HSBC said, maintaining its GDP growth estimate at 5.3 per cent for the current fiscal.
“It is important not to overestimate the potential impact of the elections on the real economy in the short term,” it added.
Barclays said the recovery will set in only from FY17 onwards, identifying “fuel, land and order pipelines as the constraining factors for growth.”
The last two years have been particularly weak on the growth front, with FY13 witnessing an expansion of 4.5 per cent. Moreover, the current fiscal is also expected to witness below-5 per cent growth.
Many economists feel that policy paralysis and excessive delays in project clearances on part of the outgoing government were main reasons for the dip in the growth rate.
Expectations of a Modi win have made investors extremely bullish, resulting in equity markets touching all-time highs and the rupee recovering back to under 59-mark against the dollar on higher fund inflows.
Barclays added that infrastructure, which had been facing headwinds during the UPA rule, will be the first to recover.
In the first two quarters of the fiscal, there will be positive news flow on actions by the new government, which we should expect, it said.
“The win is an opportunity to give much needed direction and decisions on the infrastructure, retail and insurance sectors to build jobs and bring fresh investments and address the more urgent issues to build confidence,” DBS Bank said in a statement.
HSBC said in spite of some appreciation in the rupee on back of fund inflows, the domestic currency will keep hovering around the 62 level.
“There is still some uncertainty about longer-term policies of the new government and whether the improvement of the rupee’s external balances can be sustained,” it said.
In a report, Deutsche Bank said that expectations are exceptionally high for the new government with regards to reforms and governance.
“First on the to-do list, as widely expected, is to get project clearance and implementation expedited. Reducing regulatory uncertainty and simplifying procedures for obtaining clearances would be a priority.
“It would also help boost investor confidence appreciably, if the government can set up a single window clearance facility for investment related to infrastructure projects,” it noted.
Besides the report has listed out four areas where reforms are needed over the medium term. They are revival of the manufacturing sector by reducing infrastructural bottlenecks, direct and indirect tax reforms, expediting subsidy rationalisation and capital account liberalisation.