Stage set for high GDP growth

With a positive external environment, improving macro data and a track record of governance under its belt, the Modi government will only have itself to blame if it does not perform

Now that equity markets have run their course, it's time to see fundamental justification for the rally. A strong government at the centre without any coalition pressures will have no excuses for non-performance if they fail to deliver.

Analysts and economists have been bullish on the new government not only on expectations of a push to the reform process but also because of improving global scenario. A report by Indranil Sen Gupta and Abhishek Gupta of Bank of America Merrill Lynch (BoAML) says that India is likely to overtake Brazil and Russia to become the second largest BRIC nation by 2017.

The report says that India can achieve a 7.5 per cent growth rate by 2018 which will be possible on account of a US recovery, and stable and marginally lower oil prices. Moreover, BoAML expects RBI to recoup foreign exchange reserves to guard against contagion in contrast to import cover almost halving since 2008.

The report feels that the effect of Fed tapering might lead to another round of emerging market sell-off but it is the US recovery which will provide stability as it would spur export growth. Tapering has already stabilised oil prices and reduced trade deficit. Going forward it would help contain 'imported' inflation.

It is against this backdrop that the brokerage firm expects Modi government to push reforms which have been on a standstill in 2004-12.

Among the other factors that will be supporting the government will be the reform measure taken by the UPA government post 2012. The latest current account deficit (CAD) figure has fallen to 0.2 per cent of GDP and the sharp rise in share prices of Axis Bank and Larsen & Toubro has helped increase the government-owned SUUTI's (Specified Undertaking of the Unit Trust of India) valuation to Rs 60,000 crore.

Apart from industrial, investment and infrastructure growth, BoAML expects the government to increase investment in agriculture to 21 per cent of GDP from 12 per cent of GDP in 2004 which should help rein in inflation.

In addition BoAML's team after a visit to Gujarat has identified five scalable ideas which can be adopted for higher growth. According to them better water conservation, rural electrification, friendlier land acquisition schemes, single window clearances to fast track project clearances and business friendly governance can go a long way in pushing the country's overall growth. 

With a positive external environment, improving macro data and a track record of governance under its belt, the Narendra Modi government will only have itself to blame if it does not perform.