The “Modi Magic” continues in India. Ever since last May’s election of new Prime Minister Narendra Modi, India has been showered with good fortune.
Here’s one way to measure India’s new found flow of money: India’s foreign exchange reserves rose $1.39 billion in the last week of March alone, putting the Reserve Bank of India’s (RBI) rainy day fund at $341.37 billion. India is no longer far behind its other BRIC peers. Russia’s Central Bank has $360 billion. Brazil has $371 billion.
This is the second time in a two week period the reserves have risen as the RBI gets busy buying dollars from the open market to prevent the rupee from strengthening too much. Yes…strengthening. The rupee closed Friday at 62.09 to the dollar. The Indian currency has gained 2% against the dollar this year, which is not easy. Russia’s currency, the ruble, has gained too but that is because it was sent to the slaughterhouse in December when it hit an all-time low of 70 to 1. The rupee has been as stable as the Chinese yuan, actually. Much of that is due to foreign investors buying Indian stocks and bonds.
Everyone is bullish on Modi. That is making the government richer, and in turn making India richer as well.
U.S. businessman Ravin Gandhi, the CEO of household chemical goods company GMM Nonstick Coatings set up shop in India in 2011. He has a factory in Modi’s home state of Gujarat, one of the most developed and high tech states in the country.
“We chose Gujarat because of Modi. He ran the state when I came here. The only problem I have with infrastructure is during monsoon season, but Modi was very good working on public-private partnerships,” Gandhi says. “If we had to kick in money to help build a road to get goods out of my factory to the ports, we did it. We have 80 employees there and I’m hiring year after year,” he says, adding that the local market for his particular business has doubled in size over the last four years.
Forget the RBI and big corporate bank accounts, growth at companies like GMM means more jobs, which means more Indians gainfully employed in this nation of 1.2 billion.
For the big guns out there, foreign investors helped India’s local currency bond market grow 32% year-over-year last month.
Modi and his BJP party continue pushing through reforms, hoping to attract investment.
The latest is the so-called Land Bill. Big conglomerates like the Tata Group told FORBES last year that existing land rights policies made it difficult for utility companies to expand.
Modi has proposed changes to the law which will make it easier for companies to buy land. If it passes, the changes would speed up development in rural infrastructure like roads and electric power, as well as rural housing. Those two items have been used by Modi as the calling card to the land acquisition bill. It also helps India build up its defense industry, too. And India’s small family farms are wary about the bill, fearing that their back yards might have a Tata coal fired power plant breathing down their necks in the future. Or, they might be bought out on the cheap and not know where to go from there. The opposition party, led by the former ruling Indian National Congress, calls the land bill anti-farmer. This is shaping up to be a fight. The market will be watching to see if Modi takes one on the chin, or is able to reform land laws in his country.
“Those spreading lies do not know how to protect the interests of farmers,” Modi reportedly said during a rally this week.
Such are the sticking points to building a wealthier society.
India, compared to its BRIC counterparts, is notoriously underdeveloped and poor. But if there is one unanimous call out there among businesses and portfolio managers it is this: India is going to grow. India is going to get even richer.
The Indian economy is the bright spot in emerging markets today. Much of the success factor rests on Modi’s shoulders for now. It appears that the majority of people think he can improve people’s lives.
“Growth numbers are now much higher and the current account deficit is comfortable, in part due to the fall in gold imports and lower oil prices,” says Paul Cashin, IMF Mission Chief for India. “New investment project announcements have started to pick up, particularly in the power and transport sectors.”
India will have the largest and youngest workforce in the world over the next 15 years, the IMF said in a report published March 15. It needs to create jobs for an estimated one hundred million young Indians who will enter the job market in the coming decade. Raising India’s growth rate and ensuring it begins to generate sufficient jobs requires structural reforms, including permitting big power companies to expand. India needs electricity to power this growing workforce. It also has massive infrastructure needs that are imperative to building out a modern, 21st Century society, like water and sewer treatment facilities. For most Indians, this is a luxury.
Modi is making India richer already. It has to trickle down. This will be Modi’s toughest task.
One way, investors point out, is Modi’s “Make in India” campaign, designed to bring investment to Indian factories, like GMM in Gujarat.
Meanwhile, India’s growth will not be immune to the whims of the Fed.
“The RBI is building up the reserves to counter any future financial shocks like the one which was witnessed at the time the tapering announcements were made. Apart from that, the reserves will also act as a support to the rupee,” Anindya Banerjee, Kotak Securities senior manager told The Economic Times of India on Saturday. Emerging market central banks hold the bulk of their reserves in dollars. All of them are trying to hold onto what they have, or build deeper pockets, in case the U.S. Federal Reserve raises interest rates later this year. Higher interest rates will attract fixed income investors to U.S. Treasurys and thus pull billions away from bond markets in India, especially low yielding debt.
“India is a good environment for stocks,” says Bryan Carter, a fund manager at Acadian Asset Management in Boston. “It’s just not so good for bonds. I think everything is priced in, maybe to the extreme.”
~ Kenneth Rapoza, Forbes Magazine