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Modi’s election: A positive choice for India’s economy and its $200Billion IT Industry

Gaurav Sharma | Last Modified - Jun 24, 2014, 07:49 PM IST

Modi is a shrewd, pragmatic, and decisive leader, who can kick-start economic growth and development in India by fostering a more business-friendly policy environment.
  • Modi’s election: A positive choice for India’s economy and its $200Billion IT Industry
    Modi’s election: A positive choice for India’s economy and its $200Billion IT Industry
    About Gaurav Sharma: He is both Senior Vice President and Managing Director of martinwolf’s India Practice Group and is currently based in Bangalore, India. He is an M&A professional with more than 16 years of experience in the IT industry, and in his time at the firm he has led several buy-side and sell-side engagements in the IT solutions, enterprise application and busies process outsourcing space.
    “For any Prime Minister, the primary basis for success is to make the ministers work as one team. The way Modi is known to function, it’s reassuring that he is capable of sorting out the problems of his council of ministers and convert them into an able and performing group.”
    -- Editorial, DainikJagran

    The landslide win last month by the Narendra Modi-led Bharatiya Janata Party (BJP) is not only a clear mandate for the business-focused party but also a repudiation of the overbearing regulatory atmosphere and stifling business climate that has defined the Indian economy under the Indian National Congress Party for a major part of their last term.

    Modi is a shrewd, pragmatic, and decisive leader, who can kick-start economic growth and development in India by fostering a more business-friendly policy environment.

    The fact that most of the state governments in India are under the BJP only strengthens his position further.

    Modi’s record as Chief Minister of the state of Gujarat during his 13-year term shows his potential to revitalize the Indian economy. He has distinguished himself as a business-oriented, results-driven leader with an average annual state domestic product of 16.6%, much higher than the national average.

    So can the model which Modi successfully applied in Gujarat, translate to the nation? Yes. With the country electing him as the leader of the first single-party government in 30 years, he will have a handpicked team of ministers to successfully execute the BJP agenda throughout his entire 5 year term.

    Modi and his party have focused on two major initiatives: driving foreign investment (FDI) and building India’s infrastructure. Successful execution on both of these fronts will be critical to his being able to revive the Indian economy from its present day slump. By streamlining the FDI approval process and actively courting foreign investors, the new government can generate new investment with which to strengthen the economy. By focusing on updating and expanding infrastructure (BJP announced in their election manifesto that they are seeking both to build 100 new “smart cities” and develop India’s 100 “most backwards” districts) the party has the potential to send positive ripple effects throughout the entire economy.

    Modi’s supporters and likely advisors have been championing this new focus throughout the election process. Two prominent economists, Columbia University professors JagdishBhagwati and ArvindPanagariya, are famous for their strong advocacy for FDI and their expectation for Modi to quickly reverse unfriendly policies from the previous administration. In a recent interview appearing in Forbes, Bhagwati advised opening the floodgates: “Prime Minister Modi can break that mold [of the previous administration], as he did in Gujarat, and declare that all FDI is welcome,” which would result in huge opportunities for the Indian economy as a whole.

    Modi has a history of such engagement on a smaller level. As chief minister of Gujarat, he brought broadband internet to remote villages and launched two major modernization projects to leverage the benefits of IT infrastructure. The ‘e-dhara’ project computerized land records, while ‘e-Mamta’ was used for storinginformation on maternal and child health.

    Members of the Indian governmenthave promised to apply similar ideas on a national scale. In a statement to Parliament, President Pranab Mukherjee said: “E-governance brings empowerment, equity and efficiency. It has the power to transform peoples’ lives. The backbone of my government’s new ways of working will be a Digital India. IT will be used to drive re-engineering of government processes to improve service delivery and programme implementation. We will strive to provide Wi-Fi zones in critical public areas in the next five years. My government will rollout broad band highway to reach every village and make all schools e-enabled in a phased manner.”

    For the Indian economy, this could not have come at a better time. Modi and the BJP inherit an economy that by most measures is trending in the wrong direction. GDP growth, which in the last 10 years excluding 2009 has consistently achieved rates of 8% or higher, has faltered in the last two years with rates of 7% and 5% for 2011 and 2012, respectively. Annual Inflation is trending the other direction, with rates of 3.78% in 2004 growing to 9.13% in 2013.

    The uncertainty caused by these trends, as well as declining industrial production and a faltering Rupee have together contributed to flagging M&A scene. The IPO market has been dormant IPO (with 57 IPOs in 2013 compared to 67 in 2009) and cross-border M&A deal volume with Indian sellers holding steady or declining since 2010. On top of this, regulatory burdens and allegations of widespread corruption have led to a decline in both domestic and foreign investment.

    Then there is the factor of external debt and trade deficits. Both have experienced negative or weak performance over the past 5 years, with external debt increasing by nearly 48% (see the Debt Stock graph in Exhibit 2) and trade deficits also increasing by 51% (refer to the Trade Balanceand Total International Reserves graph in Exhibit 2). At the same time, domestic consumption is projected to increase by 33% in 2015 with a simultaneous appreciation of the rupee (see Exhibit 1)—creating a strong case for FDI in India, as the World Bank would say.
    Exhibit 2 – Forecast of Indian Economy

    Source : Economic Intelligence Unit - EIU

    This economic revitalization will be significantly felt in India’s IT industry, which is expected to reach $200 billion during the next five years. As such, it will benefit from the BJP’s efforts to revitalize the economy as a whole. But the technology industry also stands to uniquely benefit from the party’s modernization efforts. As the largest contributor to IT spending in the country, the Indian government has the potential to significantly lower compliance costs and directly stimulate industry growth. Additionally, technology companies have an opportunity to further benefit from BJP’s government reform efforts by facilitating e-governance platforms across India.

    One cautionary development for the IT industry, however, will be the strengthening Rupee (Exhibit 1), which will hurt margins for tech companies that receive much of their revenue in dollars. But we expect this effect on margins to be tempered by growing demand from both a strengthening domestic market as well as foreign buyers looking to acquire increasingly competitive Indian IT companies—as should be evidenced by more IPOs and a growing number of cross-border transactions.

    Ultimately, we view this election as a positive development, and we join Indian industry leaders and commentators in noting the vast potential ahead for the Indian economy as a whole. Following the announcement of Modi’s victory, TCS CEO N Chandrasekaran was quoted as saying “A strong and stable government at the Centre will help drive the next generation of reforms, speed up policy making thereby boosting prospects for economic growth.”

    His optimism has been echoed across the industry, both in similar public statements and privately the many meetings that we have been part of during the election season. True, challenges will remain as India strives to correct the missteps of its recent past—but we too look forward to a prosperous and improved business climate and the accelerated IT development and M&A activity that will no doubt result.

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