India’s Modi is being put on a pedestal – and he’s got a long way to fall

Indian businesses are jubilant about the result of the Indian election, which returned Narendra Modi as the country’s next Prime Minister  – MNI’s business sentiment indicator shot up from 61.9 in April to 67 this month (the highest in two years), when it became clear that Modi would take the crown. Anything above 50 signals expansion.

 

Most of this was driven by the sub-index for expectations in three months time, which rose to 80.3, the highest the Deutsche Borse-owned survey has ever recorded. What exactly Modi can do in the next three months to satisfy that sort of expectation isn’t clear, but whatever he’s selling, Indian markets are buying for now. 

 

Bank of America Merrill Lynch offers some suggestions as to what Modi could do – bringing better utilities, like those in the state he governed, Gujarat, is among the top. Water and electricity improvements could definitely benefit the whole country. But Gujarat has actually dropped in the rankings of Indian states on one of these issues, and not improved on the other.

 

Nevertheless, BoAML say that they expect GDP growth to rise to 7.5 per cent by 2019, with the Indian economy outstripping Brazil, Russia, Italy, France and the UK in size on the way. This would be India heading back to the sort of growth it saw before 2008, which would be good for the country, but not necessarily a reflection of changes made by Modi.

 

What's more, there are two big risks to Modi from factors completely out of his control – BoAML recognises the threat from oil prices, where a spike could send India’s current account deficit sharply upwards. Even if the Prime Minister revolutionised the country’s power infrastructure, such a change would take years and India would continue to be dependent on energy imports.

 

The second major risk, outlined by Deutsche Bank, is a relatively dry monsoon season, which could bring agricultural growth to a standstill. Modi has convinced markets he is an extremely talented governor, but as far as we know, he can’t make it rain.