May 17, 2014 4:54 am JST

Modi's ascent fuels hopes for economic reform in India

SATOSHI IWAKI, Nikkei staff writer

NEW DELHI -- Opposition candidate Narendra Modi is set to become India's next prime minister, and his pro-business track record and pledges have markets hoping for a turnaround for India's elephantine economy.

     As vote counting proceeded Friday, India's financial markets enjoyed across-the-board gains, with stocks, bonds and the rupee all rallying. The Bharatiya Janata Party's anticipated landslide victory heightened investor expectations for economic reform.

     The benchmark Sensex index climbed 6% at one point, and the rupee attracted buyers as well. According to Reuters, the Reserve Bank of India intervened to control the rupee's rise, buying dollars and selling the Indian currency.

     Investors are optimistic about India's first new administration in 10 years. Prime Minister Manmohan Singh's government has been unable to offer effective solutions to the economic slowdown in India, a leader among emerging markets.

     Under the Congress party, which took power in 2004, India logged strong growth, reaching the 9% range at times. But this has been slowed by such factors as foot-dragging on infrastructure projects. The economy grew only 4.5% in fiscal 2012, and likely climbed only 4.9% in fiscal 2013. The unemployment rate among urban college graduates is 26%, rising to 36% in rural areas.

     In an interview with The Nikkei after his nomination as the BJP's candidate for prime minister, Modi laid out plans to revive the economy, including such steps as nurturing the manufacturing sector and opening the technology and medical fields to foreign investment.

     Foreign businesses are taking a particular interest in Modi for his track record as chief minister of Gujarat. Frequent blackouts across India spurred him to build up the power grid. He attracted such automakers as General Motors, Ford Motor and Maruti Suzuki, bolstering local employment.

     One of the most anticipated aspects of "Modinomics" is deregulation of foreign investment. Last year, India removed a 74% cap on foreign stakes in telecommunications companies, encouraging non-Indian electronics makers to produce locally and drawing attention from such manufacturers as Samsung Electronics. It is rumored that a 49% cap in the promising insurance industry will be raised as well.

     Panasonic stationed an executive vice president in India last month to lead the company's emerging-market business. Suzuki holds the largest share of the Indian auto market, and Japanese automakers boast a total of more than 50% of the passenger-vehicle market. Indian markets are stagnant now, but if they pick up steam from the change in government, Japanese companies could reap the benefits.

     The main issues to be addressed are complex tax and regulatory codes as well as opaque business practices. Recently, Japan's Daiichi Sankyo and Nippon Telegraph and Telephone Corp. have effectively withdrawn from India. It is still unknown whether Modi can develop his pro-business policies on the national level.

     On the diplomatic front, improving relations with the U.S. is an imperative. Washington previously denied Modi a visa on the grounds that he did nothing to stop clashes between Hindus and Muslims in Gujarat.

     Modi also criticized China on the campaign trail for its expansionist policies. A hard-line stance by the new administration could weaken Indo-Chinese relations.

     Japan, on the other hand, apparently has little to fear. Tokyo has already started appealing to Modi to make the country his first travel destination. Hopes are high for discussion of a nuclear cooperation agreement and export of the Maritime Self-Defense Force's US-2 amphibious search-and-rescue craft.