India, the new growth miracle

Although Modi's reform implementation has seen a few setbacks, positive developments have happened, especially in attracting FDI. If the effort continues, it could spark an investment boom in India. A larger manufacturing sector would offer not only more export opportunities, but makes it possible for India to enjoy a period of high productivity growth. 

"The latter could be translated into higher wage growth that boosts consumer demand. The potential and a reform-friendly government support our positive view on India's domestic-led growth. An average growth of 7.5% is expected in the coming three years", says Nordea Bank.

However, the potential for the investment boom cannot be realised without reforms. If companies are to increase capital spending, the domestic funding situation needs to improve. This is especially important as expected higher rates in the US would make external funding more expensive. 

Indian companies have struggled with large corporate debt in the past two years as economic growth has been weak. The NPL ratio is estimated to have risen much faster than official numbers suggest, to more than 10%. 

The problem is worst for public-sector banks, which account for over 70% of the loan stock. Banks have become increasingly risk-averse and hold back on new lending. In July, bank lending grew by 10.8% y/y, close to the slowest pace in more than a decade.