ECONOMIC VIEW: ′Modi′nomics A re-defining moment for India′s ′Hindu rate of growth′

After nearly two decades, India is poised to be ruled by a majority government with a strong growth agenda. Most commentators expected a swing towards the National Democratic Alliance (NDA) but few even considered that the development agenda would prevail over sectarian politics that have dominated India in recent decades.Another noticeable factor of these elections has been the strong polarisation of the large states, especially in the north, central and the west towards the NDA alliance. This should signal better state-Centre co-ordination especially when it comes to the reform agenda. No state chief minister in India′s political history has gathered sufficient clout to lead the Centre. Modi will hopefully use his experience as a former state chieftain coupled with a strong mandate to carry through implementation with relative ease.Even as we await the new Budget, it is widely expected that this young government will adopt a pro-growth, anti-inflation stance. However, balancing growth and deficit at the same time can be difficult and may lead to measures in the short-term like reducing interest rates to encourage growth while inadvertently fuelling inflation.Crippled by its lack of a clear mandate and a focus on election-led consumerism to revive its waning fortunes, the former government′s recent policies encouraged inflation and a drop in investor confidence. A shift away from the ′new′ Hindu rate of growth of 5 per cent has therefore seemed hard to accomplish in recent years. Acceleration of economic reforms and focus on infrastructure investment will therefore be key if that is to be achieved. That said, neither reform nor infrastructure investment are likely to lead to an immediate uplift on the growth rate though both will strongly establish the country on the right trajectory and enhance investor confidence.Infrastructure sectors that are likely to benefit are energy, logistics and transportation, aided by greater availability of private sector credit as a means to curb the budgetary deficit. An area that will be of particular interest to watch will be the re-initiation of public-sector divestment to help bring down the deficit. Given the high trade deficit, traditional import sectors like defence and oil and gas should also draw foreign investment. Interestingly though, the de-control of gold imports will have the reverse impact on India′s trade deficit. Retail reforms of course would be a closely watched area as the BJP′s manifesto has opposed it.Indian corporate valuations continue to remain high but should be viewed as having truly discounted the government′s pro-industry growth stance. We expect a strong revival in overseas interest in India and adopting a wait-and-watch approach is unlikely to yield to a better outcome for the undecided.While the governance mandate is clear, not sticking to a bold agenda endangers the risk of confining the world′s third largest economy to ′junk′ status damaging the government′s credibility. Foreign direct investment (FDI) is at its lowest levels in years, so gracefully bowing out of tax disputes with the likes of Vodafone, Nokia, IBM and Shell - although potentially detrimental from a budgetary deficit perspective - will go a long way towards encouraging badly needed inward investment.Atul Monga is an Associate Director in Grant Thornton's M&A team in London and is a key member of the firm's South Asia Group (SAG), focusing on cross-border transactions between the UK and the Indian sub-continent. Atul has nearly 10 years of experience in M&A and specialises in technology, media and telecoms (TMT) transactions. The above article was published in India Inc′s print edition of the India Investment Journal launched in June 2014 in conjunction with the India Inc Seminar: A new dawn for India - What does it mean for UK-India Business