Indian economy awaits national elections

Source: Mckay Savage/Creative Commons
Source: Mckay Savage/Creative Commons

The outcome of major elections this spring in India are being closely watched as a barometer for the future health of the country’s economy, which has been plagued by high inflation and a weak currency the past two years.

The elections will determine which of the two powerful parties, the Indian National Congress or the Bharatiya Janata Party, will lead Parliament and govern the country for the next five years starting in May.

The INC has been in power for the past decade and has been credited with spurring India’s immense growth and expansion. But more recently, fallout from the global recession, corruption, inflation and unemployment have tainted the party’s reputation.

The opposing BJP has nominated Namrenda Modi, known for his pro-business stance and the expansion of the state of Gujarat, where he is chief minister. Modi and the BJP currently lead in the polls and are favored to win the election.

Alfredo Munoz, founder and principal of Abiboo Architecture, is paying close attention to the outcome of the elections, as India is the biggest market for his company’s architecture services.

“Depending on who the ruling party is, the alliances and economic strategies will change, which will have a huge impact on foreign investment,” Munoz says.

A weak currency and high inflation have raised concerns about India’s longer term growth — a far cry from a decade ago when the country was growing at a pace of 8 percent annually. Growth has decelerated, falling to 4.8 percent last year from 5.1 percent in 2012.

According to the United Nations World Economic Situation and Prospects 2014 report released this month, India’s economy is expected to continue to grow at a slow rate of 5.3 percent in 2014 and 5.7 percent in 2015.

The current rupee exchange rate has been hovering around 62 or 63 rupees in 2014 and much of the last few months of 2013. The rupee lost 20 percent of its value in 2013 on fears that the U.S. would scale back quantitative easing stimulus.

The U.S. Federal Reserve has scaled back its bond-purchasing program in two steps so far: from $85 billion a month to $75 billion in December and from $75 billion to $65 billion in January.

According to a Reuters poll, the BSE Sensex, India’s major stock market, is expected to perform better in 2014 than it did in 2013, when it posted a 9 percent gain.  In 2012, the Indian market surged 25 percent as foreign investors bought $24.4 billion worth of Indian stocks.

The Fed’s initial steps to reduce its quantitative easing have made it more attractive to move capital back to the U.S. from India, according to Munoz.

“Even if interest rates are still higher in India, the risk and reward factors are not adequate,” Munoz said. “When this happens, there will be more supply than demand for Indian rupees and thus the currency rate will come down, especially when the internal economy is far from strong.”

In an interview with BBC News India, the World Bank’s Chief Economist Kaushik Basu, also the former chief economic advisor to the Indian government, pointed to poor governance as a contributing factor for slowing growth in 2014.

“Decision-making is slow; the bureaucracy is extremely cumbersome,” Basu said in the interview. “But it’s difficult to change it as it has been the legacy of the last 60 years.”

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