Asia Summit 2015 - Modi's Second Year: Realism After Optimism

Macroeconomic Overview and Growth Outlook

• India's GDP growth rate was announced at 7%, with the Deutsche Bank projecting 7.5% for the fiscal year with a downward bias.
• Macroeconomic indicators are rated "amber to green" by Deutsche Bank, citing stable growth, falling inflation (down 400-500 basis points), and positive rail rates.
• Foreign exchange reserves have increased by $100 billion over the last two years, reaching approximately $380 billion, with the Reserve Bank of India (RBI) comfortable aiming for $500–600 billion (roughly a quarter of GDP).
• The RBI intervened to prevent sharp rupee appreciation, accumulating an estimated $80 billion in reserves over the past year to maintain export competitiveness.
• The rupee is expected to remain within the 66–68 per USD corridor, though the exchange rate with the Chinese yuan is gaining significance due to trade dynamics.
• Global markets view China as a $10 trillion economy versus India's $2 trillion, with both nations presenting opportunities for global capital rather than direct competition in the immediate term.
• Deutsche Bank remains constructive on China, anticipating a return to 7.2% growth in late 2015, with property markets stabilizing in tier-one cities.

Reforms and Governance

• Legislative reforms at the central level are expected to face significant headwinds until 2019 due to the composition of the upper and lower houses of parliament.
• The government is shifting focus to "competitive federalism," empowering states to compete for investment, as evidenced by smaller states like Jharkhand leading the "Make in India" checklist.
• State-level investment conferences are increasingly held in Mumbai, indicating a proactive approach by regional governments to attract capital despite central legislative delays.
• High-level corruption has reportedly decreased, with recent telecom and radio auctions proceeding without major scandals or uproar.
• The bankruptcy code is identified as the most critical missing reform to prevent productive assets from becoming unproductive and to rejuvenate public sector banks.
• Infrastructure development remains a bottleneck, as global capital lacks "absorptive capacity" due to unresolved issues like land acquisition, security of land deeds, and stalled individual projects from the previous administration.
• The ESR Group notes increased transparency in regulatory approvals and permissions, particularly regarding state-level competitive federalism.

Political Landscape and Elections

• The upcoming Bihar state election is viewed as a critical test, with the ruling NDA (Modi's party) holding a slight edge based on a shift in voter sentiment toward development rather than caste politics.
• Political analysts note that the "development" narrative, championed by Narendra Modi, is challenging the traditional dominance of caste-based and secularism-based rhetoric in Indian elections.
• The first-past-the-post electoral system creates volatility where small swings in vote share can drastically alter seat counts, particularly if the opposition unites.
• State elections are becoming the primary vehicle for reform delivery, as states account for 60% of total government spending and control primary and secondary sector policies.
• Prime Minister Modi's second year has shifted from the "optimism" of his first Independence Day speech to a "realistic" tone, acknowledging the need for three terms to achieve reform goals compared to his previous two-term prediction.

Sector-Specific Trends

• Domestic business confidence is rising in financial services, healthcare, education, retail, and e-commerce, with growth rates in domestic telecom requirements outpacing the last two years.
• Foreign multinationals are currently in an exploratory phase, with increased conversations but no significant increase in capital spending yet.
• The Indian startup ecosystem, particularly in technology and internet sectors, is described as "unprecedented," with the expectation of generating global-scale winners within the next three to five years.
• E-commerce currently represents only 5–6% of total Indian retail, indicating significant room for growth and innovation.
• FinTech is identified as the next major wave of investment and activity following the initial e-commerce boom.
• Foxconn is cited as a bullish example of a company entering India due to state government support in land acquisition and labor, signaling the beginning of a trend where state and center align to facilitate investment.

Challenges and Risks

• A significant skills gap persists, described as the risk of India's "demographic dividend" turning into a "demographic disaster" due to the inability to create 15 million jobs annually.
• Corporate governance remains a challenge, with historical mistrust of promoters and difficulties for investors in enforcing rights and exits.
• The "Chinese situation" caused a market swoon, though India emerged as a relative safe haven for emerging market growth in the interim.
• Trust between Indian and Chinese entrepreneurs remains low, making direct FDI joint ventures unlikely for at least a decade, though trade corridors are expected to develop first.

Forward-Looking Statements and Panel Consensus

• Economic Outlook: Panelists unanimously expect market performance to be "up" in the next year, with India outperforming other emerging markets.
• Political Terms: The desired political term for reforms is three, though the reality is currently viewed as two terms; two terms are deemed sufficient to reach a $5 trillion economy by 2024.
• CSR Initiatives: Panelists highlighted specific CSR focuses, including employability (Deutsche Bank), digital divide bridging (Tata), and primary education.
• Modi's Performance: The panel characterizes the current phase as "optimistic realism," acknowledging the need for patience as reforms are implemented gradually through state-level action rather than central legislation.