PM Modi brings India's economy into focus amid privatisation push

After winning a second consecutive term, Modi is realizing his popularity and support going forward hinges on passing tough reforms that unleash growth and create jobs

Prime Minister Narendra Modi is putting the flagging economy back on center stage after announcing the biggest privatisation drive in more than a decade and making renewed attempts to ring fence the crisis-ridden shadow banking sector.

The country is in the midst of a deepening slowdown amid waning consumption -- the bedrock of the $2.7 trillion economy. And while Modi has targeted transforming India into a $5 trillion economy by 2025, of late, most of his attention has been focused on asserting a more muscular foreign policy and placating the Hindu majority -- his main voting base -- by scrapping autonomy in India's lone Muslim-majority state of Jammu and Kashmir.

On Wednesday, Indian authorities went on an overdrive. The government decided to sell its entire stake in the country's second-largest state refiner, and its biggest shipping company. It also approved a proposal to pare stakes below 51% in some companies and pushed for an introduction of a new industrial code bill. Meanwhile, India’s central bank seized a troubled shadow lender to try and contain defaults from spreading in Asia’s third-largest economy.

"This is Modi's renewed attempt to instill confidence in India's economic potential," said Priyanka Kishore, head of India and Southeast Asia Economics at Oxford Economics, Singapore.

She added it was imperative for the Modi government to announce these measures as it attempts to bridge a widening fiscal deficit following the dismal tax collections and cuts to corporate tax rates worth $20 billion. Earlier this month Moody's Investors Service cut the country’s sovereign debt outlook to negative amid concerns over slowing growth and revenues.

After winning a second consecutive term earlier this year promising rapid economic development, Modi is realizing his popularity and support going forward hinges on passing tough reforms that unleash growth -- and create jobs -- in Asia’s third-biggest economy. The economy expanded 5% in April to June, the slowest in six years and a far cry from 8% seen just a year ago. Expectations from data due next week isn’t rosy either.

Steep Target

Modi is seeking to raise a record 1.05 trillion rupees from asset sales. He has so far has resisted big-ticket privatization and restricted sales of its holdings to other state companies, including the 369.2 billion-rupee ($5.14 billion) sale of Hindustan Petroleum Corp. to the biggest explorer Oil & Natural Gas Corp. last year. Now his administration is selling the government’s entire stake in Bharat Petroleum Corp. and Shipping Corp. of India Ltd.

“The government’s steep $15 billion -- 5% of its total revenues -- disinvestment target in FY’ 20 may in our view need to be higher given the recent cut in the corporate tax rate and policymakers’ focus on macro stability,” said Gautam Chhaochharia, head of India research at UBS Securities India Pvt Ltd, Mumbai.

The administration’s focus on getting the economy back on track comes as it plans to offer 324 companies including Tesla Inc.and GlaxoSmithKline Plc incentives to set up factories in a bid to capitalize from the trade war between China and the U.S.

India has jumped 14 places to 63rd in the World Bank’s annual rankings for ease of doing business, rolled back a levy on foreign funds, injected $10 billion into sick banks and relaxed foreign direct investment rules in coal mining, contract manufacturing and single-brand retail trading.

The Reserve Bank of India is also poised to cut rates further after having delivered 135 basis points of rate reductions so far this year. On Wednesday, it moved to seized control of a second non-bank lender, Dewan Housing Finance Corp., stepping up efforts to contain the economic fallout from the nation’s shadow banking crisis. The year-long crisis in the shadow banking sector has snowballed to become a drag on consumption and pulled down overall growth.

"While the markets will view this as positive, the move also goes to deflect the investor attention away from the government’s non-economic agenda,” said Prakash Sakpal, Economist with ING Bank NV in Singapore. “Despite massive stimulus both the RBI and government has unleashed this year, the economy continues to be stifled as will be shown by the forthcoming GDP figures.”