What now for India?

The Indian stock market is looking expensive, so Narendra Modi must get on with his reforms to free the country’s economy.

| 5 min read

Since we last reviewed Indian prospects the country has lived through another bad dose of Covid-19 and the stock market has hit new all-time highs. The two are related, as the government and central bank response to the crisis when it first hit was to inject plenty of money into the banking system and to take strong actions to offset the damage being done by the pandemic.

The Reserve Bank of India has kept its interest rate at 4% and allowed inflation to go above 6% in May and June, claiming that this will be temporary and arguing that it needs to be accommodative to avoid more damage from the health crisis.

By western standards, the spread and virulence of the disease has been more muted on official figures, with 23,000 case per million people reported compared with three or four times that in Europe and America. It has seen 309 deaths per million compared to several times that level in the worst affected advanced countries.

It is possible, however, that especially in rural areas of India where health services are stretched there has been insufficient testing to identify all the cases that have occurred. India this year was in shock at the severity of the disease in urban areas like Delhi where health facilities were under extreme pressure in trying to cope with all the people who needed oxygen treatment or intensive care.

There has also been difficulty in producing enough vaccine to roll out a rapid vaccination programme to get on top of the outbreak, despite India having production capacity in vaccines and giving some priority to domestic needs. This has all had some adverse impact on the popularity of Prime Minister Narendra Modi, who was returned to office with a good majority and a strong mandate for more reform in 2019.

Mr Modi is a Hindu nationalist who has brought a greater nationalistic edge to Indian policy. He claims to stand up to Beijing – and has strengthened defences and had the odd dispute on the borders with China. He has been more pro-enterprise and foreign investment than his predecessors and has sought a self-reliant India. He seeks Indian advantage out of relationships with the West and positions his country in a more independent stance vis-à-vis the US. He seeks technological and financial help from the West and sees the United Nations Cop 26 Climate Change Conference in November as another opportunity to seek both money and good ideas to fuel the next phase of Indian development.

Bounce continues

The economy is expected to grow by around 10% this year, as it recovers from the big fall recorded in 2020 from the impact of Covid-19. Next year may also see above-average growth of 7% or so. The national debate will return post-pandemic to a discussion of the big programme of reforms Modi is trying to drive through and when they might do more to lift growth rates and living standards as promised.

He has landed his reform of sales taxes to seek to integrate the Indian market more fully, away from a myriad of different individual state taxes and rules. He has pressed on with farming reform, offering farmers the opportunity to sell their products in a free private-sector market instead of through the mandi system of collective state purchasing with guaranteed prices. This has proved worrying and contentious to many farmers even though the mandi and the subsidised system is meant to continue in parallel as they fear the market sometimes offering poor returns. He has put through four large consolidating Bills for labour law, sweeping up many prior laws. He has strengthened the provisions under four headings of Health and Safety, social security, industrial relations and wages. His land reforms have not succeeded in dealing with the problem of far too many smallholdings and weak tenant rights.

The farming problem is significant

Around 42% of the workforce is employed on farms producing only 16% of the national output. He has made more progress with improving sanitary conditions, spreading bank accounts to many more people and in getting tap water supplies to more homes. It is a big set of tasks to modernise India against rural inertia and argumentative political opposition.

As the stock market makes new highs, more rests on the Central Bank being right that it can get away with easy money without stimulating a longer-lasting and higher inflation. Thereafter markets will start to want more proof that the great reforms are bedding in and will serve to lift living standards faster.

Persuading many more people to leave the land and to get trained to do something better paid and more productive is going to be hard. The market is now looking expensive and needs success with growth and profits increases to justify the valuations.

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What now for India?

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