Even if 'business-friendly' BJP wins, this factor may prevent India's turnaround

Bangalore: Prospects for a strong economic rebound in India are dim as industry remains weak, and although a business-friendly opposition party looks likely to form a new government, its ability to pass sweeping reforms is in doubt, a Reuters poll showed.

An anticipated victory for the Bharatiya Janata Party’s (BJP) at the conclusion next month of an ongoing election in the world’s largest democracy has pushed India’s stock market to a record high.

But many worry that its power to drive change will be muted if it has to form a coalition with other parties, which in the past have held policy hostage to local agendas.

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[caption id=“attachment_80358” align=“alignleft” width=“380”]  The WPI inflation hit a AFP[/caption]

The latest Reuters poll of over 20 analysts taken this week showed Asia’s third-largest economy likely grew 4.7 percent in the fiscal year that ended this March, with growth seen picking up to 5.5 percent in the current fiscal year.

Growth slumped to a decade-low of 4.5 percent in 2012/13 - less than half the almost double-digit rates in 2010.

Anubhuti Sahay, senior economist at Standard Chartered Bank, said that against that backdrop, and with chances of even higher inflation, a strong government with the ability to legislate change is needed to put the economy back on track.

“If we get into a situation where again the government, because of coalition politics, is not able to implement good policies, that is the biggest risk. We have seen such situations since 2010,” she added.

India’s economic gloom deepened in the first quarter of this year. Industrial output shrank and exports fell, underscoring the enormous challenges awaiting whatever new government takes over in May.

The current government has been heavily criticized for not implementing economic reforms and for being unable to control persistently high inflation – both leading to reduced foreign investment and low consumer demand.

The Reserve Bank of India (RBI), which recently shifted its focus to retail price inflation, aims to bring that down from 8.31 percent at present to 6 percent by January 2016.

But the poll shows inflation only coming down to 7.5 percent by then. That would leave a 1.5 percentage point gap to close.

The RBI is expected to keep its key repo rate steady for another year before a modest cut in the second half of 2015, the poll also showed.

A weak economic outlook for China and the euro zone, India’s two biggest trading partners, does not help the outlook for exports, either.

Reuters