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Narendra Modi win engenders hope for India, but analysts warn against 'irrational exuberance'

May 30 2014, 12:41 IST
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Narendra Modi won India's first outright parliamentary majority in three decades. (PTI) Narendra Modi won India's first outright parliamentary majority in three decades. (PTI)
SummaryNarendra Modi's thumping victory in the recent general election has raised hopes...

India's economy probably showed few signs of recovery in the March quarter, but Narendra Modi's thumping victory in the recent general election has raised hopes of an investment-led turnaround in the coming quarters.

A Reuters poll of 48 economists predicts no clear improvement in Asia's third-largest economy, which is likely to have grown by 4.8 percent from a year earlier, a tad better than 4.7 percent in the quarter to end-December. The GDP data is due at 1200 GMT on Friday.

If the forecast materialises, it would mark a second straight fiscal year of sub-5 percent growth - the worst slowdown in more than a quarter of a century.

Narendra Modi won India's first outright parliamentary majority in three decades with a pledge to boost growth and create jobs, raising hopes among investors for a turnaround led by spending on infrastructure.

Ninety-three percent of CEOs in a polled carried out by one of India's industry chambers FICCI said they expect a substantial improvement in the near-term economic situation following the election of a strong government.

"As soon as investors see first signals of growth-supportive policies, you will see a definite turnaround on the ground," said Adi Godrej, chairman of Godrej group, a conglomerate with annual sales of $4 billion.

Godrej hopes that growth will pick up to 8 percent within two years. At the current rate, the Indian economy cannot generate enough jobs to employ the 10 million young people who enter its workforce every year.

GRIDLOCKED

Capital investment contributes nearly 35 percent to India's economy, but it probably barely grew in the fiscal year that ended in March.

Projects worth 6.2 trillion rupees ($105 billion) were shelved last year due to bureaucratic gridlock, according to CMIE, an economic think tank, the highest in the past 18 years.

Modi's reputation, assiduously built while running the western state of Gujarat, of speeding up implementation of infrastructure projects and promoting manufacturing has raised hopes of a similar push at the national level.

Arvind Panagariya, an economics professor at New York's Columbia University who is tipped to get an advisory role in the government, has called on the new administration to revamp the cumbersome tax regime and boost capital spending.

But that's easier said than done. States wield much of the power in approving projects, while only a quarter of approvals come from federal agencies. High corporate leverage and rising bad loans at Indian banks

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