Foreign Investors Prepare for Post-Election Revival in India

April 15, 2014 Posted by India Briefing Reading Time: 5 minutes

DELHI – While India’s economy typically slumps in the lead-up to national elections, international companies have begun vocalizing their intention to step up investment after a new government is constituted in May.

At a private meeting yesterday with Reserve Bank of India (RBI) Governor Dr. Raghuram Rahan, top executives from global financial services companies and institutional investors expressed optimism the RBI would enact the reforms necessary to restore investor confidence and stimulate long-term economic growth post-elections.

Hosted by the U.S. India Business Council (USIBC), attendees to the meeting featured a number of industry heavyweights, including the chairman of McGraw Hill Financial, co-chairman of KKR and co-CEO of private equity firm Warburg Pincus.

“The industry representatives, including several CEOs, heard from the Governor the challenges RBI faces in taming inflation while promoting the growth necessary to keep the engine of India’s economy thriving, all in the midst of factors beyond the respected institution’s control. USIBC reaffirmed U.S. Companies’ commitment to India’s growth and focused on reviving investor sentiment and cross-border collaboration in the first year post-elections,” a press release from USIBC said.

“USIBC members noted their strong support for RBI’s financial sector reforms, including actions to further deepen India’s debt capital markets towards long-term infrastructure development and manage risk. In addition to continued banking reforms, the contributions of non-bank financial companies (NBFCs) to the real economy – including those wholly-owned by foreign direct investment (FDI) – were raised. USIBC also discussed with Governor Rajan the importance of a vibrant payments industry with competition and dialogue spurring further innovations in mobile banking, prepaid and cash transfer remittances for SME businesses and individuals,” it continued.

Lauding Governor Rajan’s efforts since being appointed RBI chief in September 2013, CME Group’s Senior Managing Director for Foreign Exchange and Metals, Derek Sammann, said “The past year saw unprecedented volatility for Indian markets – and under Governor Rajan’s able stewardship – the Rupee has been one of the most stable currencies in emerging markets and globally.”

USIBC’s Director for Financial Policy Melissa Frakam added, “American investors are grateful for the Reserve Bank of India’s leadership of the Indian economy. USIBC looks forward to continuing the industry’s dialogue with the RBI across capital markets, banking, payment and asset management.”

The USIBC-hosted meeting comes less than a week after the U.S. Council on Competitiveness signed a groundbreaking Memorandum of Understanding (MoU) with its newly formed Indian counterpart establishing a foundation and framework for bilateral engagement and dialogue, while recognizing the importance of developing effective global competitiveness policies and strategies.

“The foundation for this MoU is straightforward. The council and the India Council on Competitiveness will endeavor to undertake activities of mutual benefit to both nations, particularly those at the heart of turbocharging high-value, innovation-based business, scientific and technological collaboration. I could not be more pleased about the coming together of our two organizations around these issues,” said U.S. Council on Competitiveness President and CEO Deborah Wince-Smith.

Pre-Election Slump

An analysis of key economic variables released this week by Live Mint highlights the historical tendency for India’s economy to slow down ahead of Lok Sabha elections. Analyzing data from the past 30 years, the study demonstrates that economic activity in India typically decreases considerably in the lead up to general elections as increased government spending fuels inflation rather than growth.

“Given that government spending is usually opportunistic ahead of elections, the spike in spending fails to lift the economy and instead stokes the fires of inflation. The average inflation during election years is 8.56 percent compared with 7.55 percent for non-election years,” the analysis noted.

According to the analysis, the average increase in nominal government spending during an election year is 15.84 percent as opposed to only 11.38 percent in non-election years. While governments may rationalize that an increase in public expenditures ahead of polls will spur economic growth and attract votes, the opposite typically happens as the average fiscal deficit increases (on average from 5.08 to 5.87 percent in election years) and businesses divert funds to political campaigns.

“The slowdown in investment and economic activity, however, is more pronounced this election season because the government failed to take policy decisions in the past couple of years while battling a raft of corruption charges. [Historically,] new project additions dry up in an election year. Investors and businessmen postpone key decisions until a new government is formed, and wait to gauge what the future policy environment will be before launching major projects,” the analysis noted.

The Next Phase

As foreign investors eagerly await the opportunity to make this assessment, India’s Ministry of Finance is reportedly preparing an outline for the next phase of economic reforms that will be presented to the new government in May.

These reforms will likely aim to boost manufacturing, stimulate infrastructure development and farm productivity while attracting increased FDI.

“We are working on deepening reforms in key sectors that will build on the growth momentum. The idea is to have a plan ready that can be tweaked quickly. The focus will be on process reforms to cut down on transaction cost and procedural bottlenecks and move towards self-certification. In a number of cases, inputs attract higher duty than the final product – this is not good for domestic manufacturing and also discourages foreign investment,” said a senior finance ministry official quoted in the Economic Times.

While all key political parties currently contesting in India’s national elections list a number of policy initiatives in their election manifestos that aim to boost economic growth, political cooperation and productivity will be instrumental to the realization of these proposals – especially after the notoriously poor productivity of India’s outgoing 15^th Lok Sabha.

As India’s general election continues in full swing, only time will tell whether the country’s next government is capable of the concerted policy action and compromise necessary to inject sustainable growth into India’s economy.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam in addition to alliances in Indonesia, Malaysia, Philippines and Thailand as well as as well as liaison offices in Italy and the United States.

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