Modi's Appeal Intact despite Absence of Big Bang Reforms: Analysts

Narendra Modi will complete a quarter as India's Prime Minister in a fortnight, but some economists, who backed him before elections, seem to be disappointed by the apparent lack of reforms by the new government.

Noted economist Bibek Debroy told Reuters that so far there have been no signs of the promised change at institutions sapped by graft and over-regulation that many Indians have grown to revile.

Surjit Bhalla, Chairman of Oxus Investments, wrote in a newspaper that a leader with such a strong mandate "should be making policy with conviction, not emulating tactics of a defunct government."

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The biggest accusation against Mr Modi's government seems to be the absence of big-bang reforms. Some say the government's first Budget failed live up to expectations. The government apparently missed a chance to lay down a concrete roadmap to do away with subsidies, which accounted for 2.4 per cent of GDP last fiscal. The Budget also refrained from cutting back costly welfare schemes launched by the previous government, which critiques say is an opportunity lost.

HSBC says a number of key reform proposals, such as the GST, require the agreement of states. The government's lack of majority in the Rajya Sabha is another constitutional hurdle for swift and far-reaching reform, it added.

Still, its economist Frederic Neumann praised the new government for "unaccustomed alacrity" on a number of fronts, such as the full opening of railways to foreign investment and new guidelines for a more streamlined bureaucracy.

Several other analysts seem to be content with the progress made over the last two-and-a-half months. Abhishek Saraf and Abhay Laijawala of Deutsche Bank say the Budget was oriented towards fiscal consolidation and laid the groundwork for stronger/more stable future growth.

Gautam Chhaochharia and Sanjena Dadawala of UBS say the initial signs of skepticism about the government's apparent inaction or lack of big bang steps for the economy is "misplaced". The duo attributes the criticism to "unrealistic" expectations from the new government rather than lack of performance.

In fact, UBS economists say the new government has taken important steps in every major area - from improving the ease of doing business (online clearance for environmental submission, allowing night-shifts for women, more overtime, etc.) to increasing FDI in defence and insurance as well as introducing real estate investment trusts or REITs.

The stock market seems to be favourably disposed to the new administration. The 50-share Nifty is up 8.5 per cent since May 16, when Mr Modi won a historic mandate. Over the same period, the MSCI Emerging Markets index has been flat.

Overseas investors also seem to retain their interest in Indian assets. FIIs bought $3.8 billion of Indian debt in July 2014, marking the second highest monthly inflow ever, according to Deutsche Bank data. Year-to-date, FII inflows of $14.3 billion into debt is the highest ever inflow for the first seven months of any year, the investment bank says.

FII buying into equities have tempered over the last two months, but year-to-date inflows (at $11.8 billion) which remains the highest among key EM peers, Deutsche Bank says.

There are early signs that retail investors are coming back to markets. Equity mutual funds have seen net inflows of nearly $3 billion in June and July.

Clearly, Mr Modi's appeal among investors seems to be intact for now.

(With inputs from Reuters)