Wood, who was recently in New Delhi, said the message from those working for the Prime Minister Narendra Modi-led government is that the administration remains committed to its reform agenda despite the inevitable setbacks triggered by Covid.
“The long-term dividends from many of these reforms will become self-evident over the due course of time as was the case with Margaret Thatcher, with perhaps the most dramatic in the Indian context being bankruptcy reform given the previous ingrained habit of the country’s major businessmen or ‘promoters’ to treat the state-owned banks as their private piggy banks,” said Wood.
He said the political position of PM Modi remains as strong as ever. Indian equity benchmarks are down about 9% from their March highs in the wake of Ukraine war, inflationary pressures across the globe, surging Covid cases in China and anticipated policy tightening by global central banks.
On the recent Reserve Bank of India’s surprise move to raise repo rate by 40 basis points, Wood said, “That it chose to do so on the same day as the conclusion of the Fed meeting was confirmation of the point…. namely that the RBI was at a growing risk of falling severely behind the curve with inflation running well ahead of prevailing interest rates.”
Wood said that previous RBI tightening move last month had been half-hearted in the sense that RBI had not raised the main headline rate but instead introduced a Standing Deposit Facility rate at 3.75% to replace the reverse repo rate of 3.35%.
Wood noted that while India’s monetary policy has been too dovish, the fiscal policy has been successful as revenues have continued to surprise on the upside so far this year.
“In this respect, five years after its launch in July 2017 and after some initial teething problems with the IT systems, the introduction of the Goods and Services Tax can now be proclaimed a major success,” said Wood.
He said geopolitical conditions are also moving in India’s favour given the growing interest in relocating production out of China.