Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

The prime minister of the world's fastest-growing major economy is having a rough time convincing investors that progress in the nearly two years he's been in office is real, or durable. It might be both. But equity markets will believe Narendra Modi's story of tough love when Indian bond yields fall by at least 1 percentage point.

In a speech last night in New Delhi to mark Bloomberg's 20th year of operations in the country, Modi marshaled evidence ranging from the mundane (growing auto sales) to the complex (more corporate ratings upgrades and fewer downgrades) and even the creative (more furniture being manufactured must mean housing's doing well) to dispel the notion that 7.6 percent GDP growth is at best a fortuitous byproduct of low oil prices and at worst a statistical mirage. 

Costlier Than China
The Indian benchmark index is almost 50 percent more expensive
Source: Bloomberg

Skeptical investors point to broken balance sheets of state-run banks and some large metals and infrastructure companies. Corporate earnings, as Bloomberg News reporter Rajhkumar Shaaw notes, have fallen in four out of the last five quarters. There are also nagging doubts about the accuracy of India's new methodology for calculating GDP, especially since the manufacturing revival that the numbers portend is nowhere in sight in monthly production data. Even then, it's possible to argue that the robust 23 to 30 percent earnings growth in the last 12 months by drugmakers like Sun Pharma and Lupin, carmaker Maruti Suzuki and software exporter Tata Consultancy was overshadowed by large profit drops at commodity producers such as Cairn India, ONGC  and Vedanta. The global oil and metals downturn isn't something Modi can fix.

At 18 times forward earnings, the benchmark Nifty Index is almost 50 percent more expensive than equities in China. India is thus a risky market, and that's how foreign investors have viewed it for the past year:

Brief Honeymoon
Global equity investors are pulling money out of India
Source: Securities and Exchange Board of India; Bloomberg

Yet there's at least one good reason why India's equity premium may be justified: In a world addicted to cheap money, here's an economy that's practically growing without any stimulus.

Very little of the plunge in crude prices has been passed on to consumers. By raising taxes on fuels, federal and state governments have sought to bolster their own rickety finances while making a $48 billion commitment toward cleaning up a power distribution industry clogged by debris of old debt and ongoing losses. At the same time, Modi's government has been so tightfisted in giving new capital to struggling state-controlled banks that the weakest among them will eventually have no option except to merge with stronger, more efficient lenders. Public servants have won a hefty once-a-decade pay award, but the middle classes are complaining about taxes creeping higher while farmers are getting only a fraction of the price increases they used to from state procurement agencies. There's no stimulus for anyone.

Stress Free
India's sovereign bond yields are easing
Source: Bloomberg

When Modi coasted to power in May 2014, analysts compared him to Japan's Shinzo Abe, another nationalist leader tasked by voters to restart the economy. But while Abe's strong dose of stimulus pleased markets no end for some time, Modi's parsimony might in the long run have a more enduring impact. Indian bond yields have already eased to 7.5 percent, an almost 40 basis-point drop since just before the government's Feb. 29 budget. It took about a 7 percentage point fall between 2000 and 2003 to lay the groundwork for a massive bull run in Indian equities. Another 100 basis points, and Modi might be starting something similar.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Andy Mukherjee in Singapore at

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Katrina Nicholas at