Investors hope India elections will bring new government to break deadlock, revive growth

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MUMBAI, India – India’s stock market has hit several new highs in the last month and the once-struggling rupee has strengthened on signs that the opposition Bharatiya Janata Party will win the largest bloc of seats in parliamentary elections that began this week and run until May 12.

The Hindu nationalist BJP has been emphasizing its prime ministerial candidate Narendra Modi’s pro-business credentials and economic success as leader of Gujarat state.

India’s once-impressive growth slowed to a decade low of 4.5 per cent in the 2012-13 fiscal year and investors are frustrated with the Congress party-led government.

Here are some of the economic and business issues at stake in the election.

— STABLE GOVERNMENT: No single party has won a majority in India’s parliament for three decades, and with many regional parties involved, coalitions are a fact of life. How well the BJP does in the elections will affect how much of its pro-business agenda can be implemented. It takes 272 seats to form a government, but analysts say the magic number for BJP is about 200 which would give it strong leadership of a coalition. Anything above 200 is likely to send markets surging higher, while anything below 180 BJP seats could signal another weak coalition and continued policy paralysis.

— INFRASTRUCTURE FOCUS: India’s crumbling roads and ports, plus lack of adequate electricity supply are high on the list of problems that make business projects hard to get off the ground. In Gujarat, BJP leader Modi made infrastructure improvements a priority, building thousands of kilometres of highways and attracting investment to build up the country’s largest modern port. He promises to bring the same focus if elected prime minister.

— FOREIGN INVESTMENT: The BJP dismayed some investors with a vow to reverse the Congress-led government’s opening of India’s vast retail industry to foreign investors. Liberalizing access to India’s $400 billion retail market is seen as one of the fastest paths to attracting investment. However, Modi’s party said it will open other industries now mostly reserved for Indian companies. That could include insurance, real estate and defence.

— PROJECT CLEARANCES: The BJP has vowed to break the bottlenecks that are keeping hundreds of business and infrastructure projects in limbo because of environmental and other regulations or land acquisition issues. But it’s unclear whether even a strong Modi-led government would have the power to do that. A recent report by Credit Suisse estimated that 75 per cent of the projects that are stuck are due to state regulations, which the central government can do little to solve.

— Labour LAWS: Modi’s party has promised to change tough labour laws that make foreign manufacturers reluctant to set up factories in India. Manufacturing makes up only 15 per cent of India’s economy, compared to 31 per cent in China. Attracting manufacturing investment is key to creating jobs for the 13 million young Indians entering the workforce each year.

— TAX CLARITY: Several international companies including Vodafone, Nokia and IBM are embroiled in tax disputes with India’s government which is claiming taxes totalling several billion dollars. Investors were rattled in 2012 when, after India’s Supreme Court ruled a $2 billion tax bill for Vodafone invalid, parliament changed the law and applied the tax retroactively. It’s unclear how those cases might change under a new government, but Modi has criticized the current aggressive stance as hurting India’s image. The BJP has promised a “clear tax policy to remove uncertainty and create investor confidence.”

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