India’s newly elected Prime Minister Narendra Modi, is the man who seeks to kick start India’s over regulated bureaucratic economy.
India’s economy has been structurally unchanged since 1960 which means that India is not industrialised to the same level as its giant neighbour China.
Its hard to imagine that India was indeed richer than China in 1990, but lagged behind its Communist neighbour ever since.
By relying on what economists call import-substitution industrialisation, initially until the 1980s, India’s attempt to produce everything at home and be protectionist didn’t deliver the industries needed for the economy.
Once it started to open up, especially after two successive IMF rescues in the early 1980s and 1990s – the largest at the time – India didn’t attract foreign investment like China did, even though both have more than a billion people.
One of the factors needed to attract foreign investment is a semi-skilled labour force.
It’s interesting what Modi has done in Gujarat – it’s reminiscent of a Chinese Special Economic Zone (SEZ) – a place that is more market-driven than the rest of the country.
In other words, the rest of China may be challenging to operate in, but these industrial zones were quicker to decide on investment and had tailored infrastructure and a migrant labour force to support business.
Gujarat is one of the top destinations for foreign direct investment in India. In fact under Modi’s leadership Gujarat will be one of the world’s most advanced high tech technological super city states.
The BSE Sensex and the broader Nifty surged to record highs while the rupee strengthened to an 11-month peak against the dollar on Friday as the Bharatiya Janata Party (BJP) led by Narendra Modi swept to a resounding majority in the world’s largest election.
Domestic-focused shares such as ICICI Bank Ltd (ICBK.NS) and Ambuja Cements Ltd (ABUJ.NS) soared, reflecting hopes the BJP and its National Democratic Alliance are best placed to revive an economy growing at its slowest in a decade, while exporters like Infosys Ltd (INFY.NS) suffered from a stronger rupee.
The wider-than-expected BJP win spurred several investment banks, including UBS and Deutsche Bank, to raise their targets for domestic shares, as they noted indexes are still relatively inexpensive and thus have more room to gain.