A good start but we need more reforms
(The views expressed in this column are the author’s own and do not represent those of Reuters)
It’s been a pleasant surprise over the last week or so as the Indian government appears to have transformed itself from allegedly corrupt politicians out to sell the country’s resources (read 2G and coal mines) into a group which means serious business.
We suddenly have a string of bold, long-pending reforms, foreign institutional investors (FIIs) are queuing up to invest in India, the rupee has risen by 5 pct in three weeks and stock market sentiment has undergone a dramatic change with indexes touching a 52-week high. Add to this the open-ended funding plan announced by the U.S. Federal Reserve and you have the perfect recipe for higher fund flows into emerging markets.
With FII funds in excess of $13 bln being pumped into Indian equity markets in the nine months of 2012, indexes have risen by more than 20 pct. However, the economic and corporate sector outlook, business and consumer confidence have deteriorated during this time. With this backdrop, what does the announcement of policy reforms signify for the country’s economic outlook?
Firstly, these announcements indicate a significant shift from a long period of policy indecision and inactivity which was plaguing the current political establishment. If reforms continue at the pace they are being undertaken, business confidence will definitely change for the better in the coming months.
But to revive the investment cycle, there needs to be a more conducive bureaucratic environment to facilitate the implementation of the measures announced. Are we going to see that happening? The government’s track record proves otherwise.
Secondly and more importantly, none of the measures announced address the core issues facing the economy — such as rising fiscal deficit, corruption, inflation, high interest rates — in an effectual manner.
This would mean the present set of reforms are a feelgood factor because of the long phase of inactivity, but would have created more impact if they had concretely addressed structural issues.
We need to urgently address supply chain issues to control inflation, bring in broad-based reforms for subsidy reduction (and hence control fiscal deficit) rather than the temporary measure of a diesel price hike, as also land and labour reforms for faster implementation of projects.
Thirdly, will these reforms help in changing the growth trajectory of the domestic GDP? Will they prevent a potential downgrade by ratings agencies? It’s a definite no in the short-to-medium term and to a limited degree in the long term. Clearly, the close-to-double-digit GDP growth in India over the last few years has been the result of aggressive private sector enterprise and investment, and in spite of a non-conducive business environment created by political and bureaucratic circles.
Yet, these reforms fall well short of aggressively encouraging private enterprise to grow freely. Take the case of FDI in retail where state governments are to give approval for permitting retail chains to set up shop. In a constantly changing political environment where the state ruling party changes every few years, which retail chain would want to go all out and set up infrastructure, only to be later wrongfooted?
Overall, the present set of reforms is a good start by the government. But this should only be the starting point for the creation of a robust platform for structural reforms. This could address a host of core issues which plague the business environment in India today. Unless that happens, and soon, the present effort will be viewed only as an effort to try and divert attention from corruption scandals.