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From an economic perspective, the election outcome strengthens the view that India is at an inflection point. Analysts believe that growth has bottomed out and better exports and a pickup in investment should drive a recovery from 2015 onwards.
While expectations are high, experts suggest that there are a lot of issues that need the government's attention. Though the Modi-led NDA has a clear majority in the lower house of Parliament (Lok Sabha), the lack of majority in the upper house of Parliament (Rajya Sabha) could pose problems for the new government in passing key legislations.
CRISIL believes that the new government's to-do list to revive the economy is a long one, and unfortunately, there is limited ability to use growth-supportive monetary and fiscal policies.
"The lowest-hanging fruits are fast-tracking of projects in pipeline and resolving iron ore and coal mining issues. This will improve the efficiency of capital that is now stuck, pave the way for better returns on investment, create jobs, lift income growth and spur private consumption demand," said Roopa Kudva, CEO and Managing Director, CRISIL.
Jyotivardhan Jaipuria, managing director and head of research at Bank of America-Merrill Lynch expects the economy and earnings to remain sluggish for FY15 and the markets will have to look through sluggish macro data and a possible poor monsoon.
Top priorities
In the immediate term, the market's focus shifts to the composition of the key cabinet ministers and the upcoming budget (by end-June/early-July), analysts say. Additionally, markets are looking forward to the reform agenda.
Sonal Varma and Aman Mohunta of Nomura expect the pace of economic reforms is likely to pick up. In the immediate-to-short term, they feel that the government could announce a single - window clearance mechanism for investment projects, time-bound environmental clearance, restructuring of exiting ministries and a focus on improving centre-state relations.
"The budget will be the first official platform for the new government to present its larger economic vision and fiscal consolidation plans. In the medium-term, we expect reforms to focus on infrastructure development, boosting agriculture productivity, fiscal consolidation aided by tax reforms and urbanisation," they say.
Points out Taimur Baig, chief economist at Deutsche Bank: "We see four areas where reform push is needed over the medium-term. These include revival of the manufacturing sector by reducing infrastructural bottlenecks; Direct and indirect tax reforms; Expediting subsidy rationalization; and capital account liberalisation (raising FDI caps in key sectors and opening up the bond market further to foreign investment)."
However, it is important to be realistic about the pace of political and economic change, at least in the near-term.
"The new government will not be able to change things overnight and the recovery in GDP growth will likely prove protracted, possibly even move sideways in the near term until we have measurable progress on reforms and investment projects. The reason for this slow turnaround is that the economy is saddled with structural constraints and it is a lengthy process to lift these," says Leif Eskesen, chief economist for India and ASEAN at HSBC.
| Potential policy reforms | ||
| Area | Objective | Horizon |
| Central government restructuring | Reorganize and consolidate the existing ministers | Immediate |
| Fiscal | Get an independent fiscal audit to ascertain the extent of payments due | Immediate |
| Strict fiscal discipline, rejig the expenditure mix away from consumption towards asset creation; simpify tax regime | Short-term | |
| Centre - State relationship | More autonomy to States on expenditure (on centrally sponsoped schemes), land laws, labour laws, in attracting foreign investments and mobilising own resources for industry | Short-term |
| Revive intsr-state council and national Development Council to increase state participation in national governance | Medium-term | |
| Manufacturing / Investment | Empanel state chief ministers in Cabinet Committee on Investments to speed up approval process | Immediate |
| Setup global manufacturing hub | Medium-term | |
| Focus on improving the 'ease of doing business' by introducing single window clearance, time bound environmental clearance; procedural simplification | Short-term | |
| Infrastructure | Investment in railways; diamond quadrilateral project (high speed trains); port development; build coastal and border highways; national fibre optic grid | Medium-term |
| Expedite the work on freight corridors and industrial corridors | Short-term | |
| River linkage and development to improve irrigation and flood/drought management | Medium-term | |
| Use e-auction route to transfer natural resources | Short-term | |
| Disinvestment | To try and turn around PSUs (more efficiency) without going down the privatisation route | Short-term |
| Agriculture | Reform agriculture produce and marketing Act (APMC) Act; restructure Food Corporation of India and PDS | Medium-term |
| Move towards a national agri market; use of technology, better quality seeds to boost productivity | Medium-term | |
| Urbanisation | Create 100 smart cities focusing on concept of twin cities and satellite towns; upgrade existing urban infra | Medium-term |
| Entitlement | Ensure effective implementation of the 'right' schemes; massive low-cost housing program | Medium-term |
| Tax reforms | Bring states on board in GST adoption; strengthen the IT network to implement | Medium-term |
| Push to bring in the DTC | Medium-term | |
| Jobs | Focus on housing, tourism and other labour-intensive industries to generate jobs | Medium-term |
| Banking sector | Recapitalise and reorganize (merge, dilute government stake in) public sector banks | Short-term |
| FDI | Barring multi-brand retail, encourage FDI across other sectors | Medium-term |
| Nomura report: India’s tour de force | ||
