India Needs More Than a Good Central Bank
Comment of the Day

February 06 2014

Commentary by David Fuller

India Needs More Than a Good Central Bank

Obviously, and that is what it will almost certainly get in the May general election.  I have written and posted quite a few articles on India since Narendra Modi decided to run for the top office and was selected as the BJP candidate.  The opening comments in this editorial from Bloomberg will be familiar to most subscribers but the conclusion is interesting, particularly the last three paragraphs:

But a modernized central bank can’t do everything -- and lately it has seemed that the rest of the government can’t do anything. The ruling United Progressive Alliance is mired in corruption scandals, with a leadership divided between an ineffective prime minister and an unaccountable Congress Party president.

Heightening the uncertainty is the rise of Narendra Modi, the charismatic leader of the main opposition -- the pro-business, Hindu-nationalist, right-of-center Bharatiya Janata Party. Modi, chief minister of Gujarat (one of India’s most successful states), is an electrifying speaker and a hero to many business leaders. His followers can be fanatical -- in both senses of the term. In the past, Modi has sided with anti-Muslim extremists. At the very least, he failed to prevent riots in 2002 that claimed more than 1,000 lives. The U.S. has revoked his visa as a result.

From a purely technocratic standpoint, a Modi-led government might be just what India needs. His record in Gujarat has been impressive, with cleaner government, new infrastructure, fiscal discipline, inward investment from India and abroad. Gujarat has consistently grown much faster than India, and the state’s poor have shared in the gains.

For a program like that to succeed nationally, political stability is essential. In India, this can’t be taken for granted. Modi has been trying to broaden his popularity beyond his Hindu-nationalist base: He has called on Hindus and Muslims to make common cause in defeating poverty. That’s fine, but his outreach to a Muslim community that still views him with justified suspicion needs to be more forthright.

India’s economic potential is staggering. Realizing that potential will require better leadership than the country currently has. Over the coming months, India will test investors’ nerves.

David Fuller's view

India has never been a market for nervous investors and May is a long way off in electoral terms.  Nevertheless, the smart money has been moving into India since last August when it became clear that Raghuram Rajan was going to be appointed governor of the Reserve Bank of India in September. 

The main litmus test for India’s volatile stock market is the Indian Rupee, shown here inversely against the US Dollar on a daily basis.  If Rajan and market forces can get it back below R62 and keep it there, India’s stock market should remain relative firm.  If the smart, charismatic and economically savvy Narendra Modi wins comfortably in May, as he certainly should, the Mumbai Sensex Index will be in line for an upside move not seen since the 2003 through 2007 period.

Lastly, if you are interested in India, do not miss this informative article from Bloomberg; it is very important: Rajan Rewarded as Dollar Yields Slide to July LowIndia Credit.

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