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India election

Modi places $1.4tn infrastructure bet on his second term

Skeptics doubt gamble to create world's third-largest economy will pay off

Prime Minister Narendra Modi has not said where he will get the money to modernize the country's infrastructure. (Nikkei montage/Reuters)   © Reuters

NEW DELHI -- Indian Prime Minister Narendra Modi's decision to strike militants in neighboring Pakistan in February is a major reason he and his ruling coalition clinched a landslide general election victory on May 23.

But Modi's zero-tolerance response to a suicide bomb attack in Kashmir was not the only reason voters backed him.

The prime minister made some lofty campaign promises, like pledging to spend 100 trillion rupees ($1.43 trillion) on infrastructure and increasing support for agriculture and rural development. These outlays are supposed to help propel India past Japan to become the world's third-largest economy by 2030.

There are real questions over whether all of this is even possible, but investors have not hidden their excitement.

The Bombay Stock Exchange's Sensex, the country's benchmark index, and the Nifty 50 Index hit record highs on May 20, after private exit polls released on May 19 showed Modi retaining power. Construction and other infrastructure stocks were in particularly high demand.

The Sensex hit another record on the morning of May 23, after early official vote counts showed Modi's Bharatiya Janata Party-led National Democratic Alliance winning a lower house majority over the opposition camp led by the Indian National Congress.

"The movement in infra stocks was spectacular," said Atul Suri, of Marathon Trends Advisory, a Mumbai-based portfolio manager, shortening the word "infrastructure." "L&T and many other construction company stocks moved. So the market definitely believes that there will be a very big thrust in infra. It will be on the government's agenda in the new term. That was the reason for the surge."

In its manifesto, the BJP promised to pour money into more than 30 infrastructure projects by 2024. The list includes 60,000 km of national highways, metros in 50 cities as well as airport and energy upgrades.

A "new India will be built on the basis of investment-driven growth," the manifesto says.

A traffic jam in Mumbai: India's infrastructure plan includes 60,000 km of national highways. (Photo by Kosaku Mimura)

The agricultural plan, meanwhile, calls for increasing financial and pension support for farmers and doubling their incomes by 2022. These were significant carrots for voters in a country where farming makes up nearly 20% of the economy.

The prime minister is also calling for more organic crops as well as for the adoption of technology to increase agricultural productivity.

Elsewhere, the government plans to shore up its "Make in India" initiative and to create a better business environment for startups.

India grew at an annual average of 7.5% during Modi's first five-year term. It was the world's seventh-largest economy in 2018 with a nominal gross domestic product of $2.71 trillion, trailing the U.S., China, Japan, Germany, the U.K. and France, according to estimates by the International Monetary Fund.

The BJP set GDP goals -- $5 trillion in 2025 and $10 trillion in 2032 -- that would lift the economy up the ranks to No. 3. But it is unclear whether Modi can carry out his policies, or if India's economy will grow so steadily.

"We have only been hearing of [the airstrike in] Balakot, in northern Pakistan," said Niranjan Sahoo, senior fellow at the Observer Research Foundation, a Delhi-based think tank. "That [was] in the BJP's own interest because in five years they haven't delivered to the extent that they had promised.

"Luck favored [Modi]. The timing of Balakot was such that it turned into a national security-centric election."

Modi's approval rating surged after the Balakot strike, but before February, the prime minister was facing an uphill battle.

Among Modi's first-term accomplishments were the introduction of the Insolvency and Bankruptcy Code, meant to tackle mountains of nonperforming assets weighing down the economy. He also pushed through a Goods and Services Tax, intended to consolidate indirect taxes.

But India will have to carry out more reforms to grow at an annual clip of 10% -- needed to build a $10 trillion economy by 2032. Lately the growth rate has slowed to around 6%.

And that $1.43 trillion infrastructure pledge will be another mountain to climb; it is equal to four of the government's annual budgets.

The BJP's manifesto does not mention where the money will come from, which drew criticism from opposition parties. If Modi's policies prove to be empty campaign slogans, investors could be disappointed.

Already the stock market is yo-yoing. After the Sensex on May 23 went on a 1,000-point rally, breaking through the 40,000 threshold for the first time, it lost all of the day's gains and closed down by almost 300 points.

External volatility will also give Modi fits. The escalating U.S.-China trade row is already playing havoc with the global economy.

"Beyond 2020," the IMF said in its latest World Economic Outlook, released in April, "global growth is expected to stabilize at around 3.5%, bolstered mainly by growth in China and India and their increasing weight in world income."

The IMF report acknowledges the Indian economy's growing importance. But there is a flip side to that: If Modi's economic management fails to improve in his second term, it could exert still more downward pressure on the world economy.

Nikkei staff writer Nupur Shaw in New Delhi contributed to this article.

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