After pouring US$45 billion into India's stock market over the past six years on hopes that Modi would unleash the country's economic potential, international money managers are now unwinding those wagers at the fastest pace on record. They've sold US$4.5 billion of Indian shares since June, on course for the biggest quarterly exodus since at least 1999.
While Modi isn't sitting idly by as the economy weakens, investors say he's been slow to act on a long list of needed reforms that includes selling stakes in state-owned companies and revamping the nation's labor laws. The growing worry is that India could be headed for a structural slowdown that pummels the country's US$2 trillion stock market, throws a wrench into growth plans of international companies from Amazon.
While many of India's problems pre-date Modi, critics say his handling of the economy has been disappointing. His 2016 decision to invalidate 86 per cent of the country's currency in circulation is widely regarded as a growth-sapping boondoggle, and his 2017 goods and services tax reform - passed with bipartisan support - has since been panned as far too complicated. Modi's early attempts to simplify land and labor laws were reversed in the face of social and political opposition.
But Modi's fiscal firepower is limited by the region's widest budget deficit and a bevy of overly indebted state-owned companies. His own advisers have warned that without major reforms, India could face a structural slowdown that keeps long-term growth far below the 8 per cent rate that many economists say India needs to create enough new jobs.
"They have spent all this political capital on Kashmir, which is frustrating," said Katalin Gingold, managing director at Cartica Management, an emerging markets focused hedge fund based in Washington DC."It seems more important to deal with the economy which looks like it could fall into a vicious cycle."
The MSCI India Index has dropped 9 per cent from its all-time high in August 2018, cutting the gauge's longstanding valuation premium over the MSCI All-Country World Index to the narrowest level since 2004. The Indian gauge now has a price-to-book ratio of 2.5, or 13 per cent higher than the global measure. When Modi entered office, the premium was nearly 30 per cent.
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