India Insight

As the economy and markets struggle, India needs tough actions

May 14, 2012

Slowing growth, a falling rupee, sliding stock markets, a rising current account deficit, drying foreign inflows and policy paralysis at the centre. Things certainly don’t look rosy for India.

With the rupee down 22 percent in the last 10 months and a 6 percent drop in stock markets so far in May (as of Friday’s close), is it time for the government to seriously rethink its strategy ahead of the 2014 general elections?

From Mark Mobius, who said the Indian government has been making many big policy mistakes, to Lakshmi Mittal, who told The Times of India on Friday that decision-making is too slow and India needs to move the way the rest of the world does — there is no dearth of criticism.

As the global economic environment continues to be weak, what is the government doing to address these issues? Right now, India badly needs reforms, foreign inflows, and most importantly, clarity and stability.

It took Finance Minister Pranab Mukherjee nearly two months to clarify his controversial set of General Anti-Avoidance Rule (GAAR) proposals, and also defer it by a year, after an investor backlash.

One wonders what took the government so long to issue clarifications, which could have helped revive much-needed inflows and improve sentiment. And even when it did, it failed to pacify investors.

As a Scotiabank executive summed it up – India changes rules too quickly. They don’t realise it hurts them in debt capital markets and hurts flows on a long-term basis.

And all this happened when global issues continued to weigh, with the worsening situation in the euro zone, especially Greece, sparking outflows.

India saw net portfolio outflows of $540 million in March and April, compared with $13 billion in inflows in January-February. The investment climate looks subdued, with net outflows of around $50 million recorded in the last week.

In all this, the common man won’t be spared. The RBI’s measures have so far failed to arrest the rupee’s decline, which is likely to hurt everyone as it makes everything from cars to television sets expensive. This just adds to the pain of managing already high inflation.

On Thursday, the cabinet deferred three bills, including the keenly watched insurance bill which proposed raising the FDI limit from 26 percent to 49 percent. The bills which push for increasing FDI in retail and aviation sectors are already on the backburner.

Mukherjee had told Reuters in March that key reforms will be approved in 2012, but said last week that delays are inevitable in a coalition-run government which needs to value the different views of allies.

The fact that India is putting more and more things on the backburner will not help boost sentiment. The government, sooner or later, will need to take a serious look at curbing subsidies and its import bill, and tackle supply side bottlenecks and push reforms. It appears it is more a matter of when, than if.

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