Lok Sabha Election Result - Modi 2.0: Here’s what experts say will drive India’s GDP

Now that it is clear that the Narendra Modi led NDA government has retained power at the Centre, industrialists and experts have now shifted their focus from Lok Sabha Elections 2019 to various reforms that can be taken in regards to the Indian economy. Many have highlighted that the NDA government must concentrate in driving India’s GDP growth to a higher trajectory. Prasanna A and Abhishek Upadhyay, analysts at ICICI Securities believe, a more stable government will have greater success in tackling these critical issues.

Their proprietary measure, I-Sec PD monthly output gap suggests that the slowdown which intensified in Q4FY19 has continued into April. It is likely that brakes on governance during elections and slower spending by government may have affected growth in May also. Both consumers and businesses may be postponing spending in lieu of elections. 

Abhimanyu Sofat, Head of Research, IIFL Securities said, "The early trend suggest a confirmation of the exit poll results, which has been taken positively by the market. Though the current index level already captures this outcome, any further trend in creating a more stable government will be considered positive by the market. Once the new government gets sworn in the focus needs to shift to arrest the recent slowdown in consumption and improve investment climate so that the GDP growth rate is sustained above 7.5%”.

Prakash Sakpal Economist, Asia at ING said, “We anticipate growth to hover around 6% in the current quarter before the pre-election boost to government spending kick-starts the economy. However, with growing headwinds to growth, especially from weak exports and higher oil prices, sustaining growth at or above 7% will be a challenge. On technical grounds, the low base effect is likely to contribute to some acceleration in the remaining FY19-20. But for now, we retain our annual growth forecast of 6.8% for the current financial year.”

Hence, below mentioned developments are expected from NDA government to boost GDP, as per ICICI Securities. 

During next few months the income transfer scheme should be implemented fully as planned. Further, reopening of the spending taps by the government will complement liquidity infusion by RBI and lead to improvement in activity levels. As such, there could be some pick-up in activity from June onwards as formation of a stable government boosts sentiment. 

With food prices also showing signs of pick up, rural consumption could get a boost from better terms of trade. Still the overall trajectory of slower growth compared to last year may be here to stay. The dilemma for government then would be whether to mount a stronger response or not. 

The duo at ICICI Securities add, “In our view, an over the top reaction could lead to bigger problems given lack of fiscal space and potential for trade deficit to widen. A better strategy would be to carefully calibrate the existing fiscal space.”

Sakpal said, “It would be interesting to see the US Treasury’s assessment in the forthcoming semi-annual manipulator report later this month, which will be based on the more stringent criterion - now less than 2% of GDP current surplus, though India still doesn't meet this, and this is likely to see more countries falling in this category. “