BY UNA GALANI

The good days are coming: India’s Prime Minister Narendra Modi needs to jump-start the economy to keep that 2014 campaign promise. Months into a second term, GDP growth of 4.5% is about half the pace ideal for its 1.3 billion people. Modi surprised markets in good ways, and bad, before. Here’s how he might do so again.

A crisis of confidence is crippling the private sector, which is hobbled by $200 billion of bad debt, and isn’t investing as demand weakens and businesses adjust to new rules on everything from sales tax to insolvency. If India Inc is now acutely aware of the costs of corruption, the pendulum of fear has swung too far. Industrialists once willing to back large infrastructure projects are now risk-averse.

One big problem is unpredictable policymaking that has seen companies abruptly stripped of key licences or whacked with costly new contractual terms. Prashant Ruia, whose Essar Group lost its steel asset through a new bankruptcy regime to ArcelorMittal, told the audience at Breakingviews’ Predictions event in Mumbai on Dec. 6 that fixing regulatory risk is key to revival.

Another sentiment lift can come from privatising businesses like Air India, an indebted globetrotting reminder of India’s inefficiencies. Modi’s earlier attempt failed. Getting it right this time would send a message that New Delhi is serious about reform. Outlining a roadmap to other selloffs would help too, Sunil Mehta, non-executive chairman of Punjab National Bank said at Mumbai Predictions.

To kick start consumption, meanwhile, direct transfers of cash into people’s bank accounts or a big spending plan on roads can’t be ruled out. The government could risk the ire of the bond market to raise the funds by relaxing the fiscal deficit beyond a target of 3.3% by March 2020 to over 4%.

A more radical option is to devalue the rupee, says Shankar Sharma, co-founder of securities firm First Global. By making Indian goods more competitive, it would boost net exports. Most of the 200-strong audience predicted in a Breakingviews poll that India may choose a combination of these measures to kick start the recovery.

Modi’s past economic surprises haven’t all worked out: Demonetisation, the shock 2016 withdrawal of bank notes, dealt a massive shock and probably contributed to the current slowdown. Investors should brace themselves for the year ahead.

First published Dec. 9, 2019

IMAGE: REUTERS/Brendan Mcdermid