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Why India really has turned a corner

Why India really has turned a corner

Elected in May on a platform of reforming a struggling and bureaucratic economy, Indian prime minister Narendra Modi has enjoyed a positive start to his term of office.

India was the only major emerging economy not to have its growth outlook cut by the International Monetary Fund (IMF) in its latest World Economic Outlook Update. The IMF retained its forecast of 5.4% growth for 2014 and 6.4% for 2015.

Recent economic data show an economy shaping up, according to John Pinkel, portfolio manager of the Indus Select Asia Pacific Fund.

‘From a cyclical perspective, data in Q2 was stronger than expected, with industrial output expanding at its fastest rate for over three years, supported by strength in manufacturing, autos and exports,’ he said. ‘June inflation data was also encouraging, with annualised inflation over the first half of the year at its lowest level since 2007.’

Although some commentators have questioned the strength of economic change in India, others believe the new direction is sustainable. Kunal Desai, manager of the Neptune India fund, said the reforms in the economy were unlikely to turn out to be a false dawn because the unprecedented strength of Modi’s party, the pro-market Bharatiya Janata Party (BJP).

Desai said he saw positive signs in the electorate’s decisive vote for economic growth over populism and the caste system and in Modi’s previous experience. ‘This presidential-style election was essentially won by one individual, Narendra Modi – a man with a track record of decisive action during his tenure as Gujarat chief minister,’ he said.

Yet the first budget under the new prime minister in July disappointed investors with a lack of detail on how the government plans to reduce the deficit.

However, Craig Botham, emerging market economist at Schroders, welcomed the government’s commitment to a goods and services tax, and the announcement that it would target a fiscal deficit of 4.1% this year.

‘The budget included a number of commitments to increase infrastructure spending and address bottlenecks in roads and ports, coal and mining,’ he said. ‘Again, details are sketchy, but given prime minister Modi’s record of dealing with red tape in Gujarat, we feel cautiously optimistic that promises to expeditiously resolve bureaucratic impasses can be met.

‘India’s economy was never going to be reformed and revived by one budget alone, and we are encouraged that policy is going in the right direction,’ Botham said. ‘We hope now that Modi proves as adept at implementation on a national level as he did in Gujarat.’

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