x Abu Dhabi, UAE Thursday 20 July 2017

Elections loom large across India

India Dispatch: Potential investors in India are adopting a 'wait and watch' approach while the country's deficits increase and business growth slips.

The Indian government has announced a series of bold economic reforms, including opening up the retail sector to FDI of up to 51 per cent ownership in supermarkets. Sanjit Das / Bloomberg
The Indian government has announced a series of bold economic reforms, including opening up the retail sector to FDI of up to 51 per cent ownership in supermarkets. Sanjit Das / Bloomberg

India's general elections may be more than a year away but the anticipation is already having a significant impact on the country's economy.

A number of foreign investors are stalling on entering India as they await the outcome of the elections, despite the government's recent push to attract more overseas investment, analysts say.

Decisions made by the government this year are likely to be heavily influenced by the prospect of the elections, as it tries to balance managing the country's slowing economy and widening deficits, while remaining popular with voters.

"As far as FDI [foreign direct investment] is concerned there is likely to be a 'wait and watch' scenario, simply because projects require many approvals and policy clarifications and these can change with a change in government," says Kamal Sen, the president and chief executive of Cogitaas, a consultancy focusing on analytics and strategy planning.

In September, Manmohan Singh's government, which was plagued by accusations of corruption over the summer, announced a series of bold economic reforms, including opening up the retail sector to FDI of up to 51 per cent ownership in supermarkets, as well as a measure to increase overseas investment in the aviation and broadcasting sectors.

The decision on retail was met with opposition from allies and opponents alike. Thousands of small shopkeepers across the country protested against the retail move, arguing that it would hurt their businesses.

The consensus among economists and industry, however, is that the move will help boost to the economy as it brings foreign investment into India, reduces food wastage and creates much-needed jobs.

Ankur Bisen, the vice president of retail and consumer products at Technopak, says that many foreign supermarket chains that might be interested in entering India are likely to wait until after the elections before committing to investments.

"Because of political considerations, people are afraid to take bold steps in retail," Mr Bisen says. "I think 2014 is an inflection point. Everyone is looking for a certain environment to emerge. That certain environment will be stability in the government and that's when things will start to fall into place."

Whatever the outcome of the election, the momentum on India's economic policy is likely to pick up after that, he says.

"There are three possible scenarios that may happen," he says. "In one scenario, the National Democratic Alliance comes to power. The second scenario may be a hung parliament with an outside majority support by UPA [United Progressive Alliance].

The third scenario is the Congress party and the UPA coming to power. In all three scenarios, what will not get compromised is the path of economic reforms because, beyond the political rhetoric, all political parties realise in their heart of hearts that these reforms are irreversible."

India's economic reforms will increasingly take a back seat to political considerations until after the elections, with the government likely to be reluctant to introduce policies that could upset the masses and become a "political hot potato", Mr Bisen says.

"On the structural policy front, we expect that the reform push will persist," says Leif Eskesen, HSBC's chief economist for India and members of the Association of South East Asian Nations. "But reforms will inch rather than leap forward, especially on this side of the general elections.

"This will help gradually lift growth, but the recovery will be protracted given the only gradual pace of reform implementation and time it takes for these reforms to have an impact on growth, beyond the near-term impact they have on sentiments. "

The demographics and Indians' attitude towards politics have changed substantially in recent years, according to Mr Bisen.

"The 2014 election is a very important event," he says. "Now people are more driven by larger causes that affect their daily life - be it economic well-being, be it health issues, be it access to basic services. These were earlier non-issues and elections were fought on religious lines. I think it's a huge shift that has happened in the last 10 years - voters are young and aspirational. These trends will converge and shape this election outcome."

There is also significant pressure on the government to try to boost India's economic growth, which has fallen below 6 per cent, and keep the fiscal and account deficits under control.

India's finance minister, P Chidambaram, last week insisted that the government was planning a "responsible" approach to the budget, which will be announced this month.

Analysts have predicted that welfare spending will increase ahead of the elections.

"Pre-election welfare spending by the government, lower interest rates, and moderation in inflation … will boost household spending and, thereby, benefit sectors such as consumer durables, automobiles, media and entertainment, community and social services, and financial services," analysts at Crisil, a global analytical company, say.

Vaibhav Agrawal,the vice president for banking research at Angel Broking in Mumbai, says that for the time being the government is still more focused on attracting foreign money.

"In the last few months they have not been populist," says Mr Agrawal. "To address the current account deficit, they need a humungous amount of foreign capital inflows and for that the government cannot afford a downgrade by the ratings agencies. They cannot afford a weak currency. The budget will be good and for the next six months the government will stick to its reform momentum.

"Possibly towards the end of this calendar year, they may go back to some populist measures," he adds. "That is a risk which is there and we have to see how that evolves. But at least for the next three to six months we are quite confident that the government will deliver on everything because there is literally no headroom for them to make any mistake at all. They cannot afford even a single dollar going out of the country."

business@thenational.ae