November 11, 2012 10:23 am

Singh promises second wave of reform

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India’s prime minister has pledged to follow up his recent burst of economic reforms with more measures to restart stalled infrastructure projects, attract foreign investment and reverse the slowdown in Asia’s third-biggest economy.

Manmohan Singh defended plans to attract capital from abroad, while admitting that India’s precarious public finances needed more international money to plug a growing gap between imports and exports.

“Some people still try to make FDI into a bogey, even invoking fears of the East India Company,” Mr Singh said, referring to the British corporation which governed large parts of India for about a century until 1858.

“Our efforts to raise the investment rate will mean higher imports. FDI is perhaps the best source of external financing to finance the deficit,” he said at the weekend.

After a period of inaction, investors have been heartened by announcements by Mr Singh and Palaniappan Chidambaram, his newly appointed finance minister, that they are moving to allow greater foreign investment in sectors including airlines, retail and pensions.

India’s economy is projected to grow about 5.5 per cent in the next financial year, although Mr Singh says the country can return to average growth above 8 per cent over the next five years, if more reforms are introduced.

Infrastructure would be one area of priority, with government planning $1tn in fresh spending, including what the prime minister described as a range of “iconic projects”, such as elevated rail lines in Mumbai, the financial capital, alongside two ports and eight airport developments.

Many analysts remain sceptical, seeing scant evidence that the world’s largest democracy can deliver the legislative changes needed to underpin some proposed reforms, including opening up the insurance and banking sectors, given India’s fractious and divided parliament.

Delays to major projects, including power stations and steel plants, lead many to doubt that the country is capable of delivering the type of large-scale schemes common in other Asian emerging markets, notably China.

“If you look at why India’s growth has slowed, it is not a mystery” said Gita Gopinath, an economist at Harvard University, speaking at the annual meeting of the World Economic Forum business group in New Delhi last week.

“Reforms have happened only on a spasmodic basis . . . India’s people, and its government, must realise that these things need to happen on an ongoing basis every year, not just once every 30 years.”

Investors are awaiting the results of two government reviews re-examining heavily criticised tax changes, including those designed retrospectively to recoup at least $2.6bn of tax from UK-based telecoms company Vodafone. Both are due to report within weeks.

Business groups are also watching carefully for action to unblock dozens of stalled infrastructure projects and increase coal imports to the country’s fuel-starved power plants. Senior officials have promised progress on both fronts by the end of the year.

Even so, about half of the expected infrastructure spending increases are poised to come from India’s battered private sector, just when major industrial conglomerates have cut investment sharply, against a backdrop of slowing demand and high interest rates.

A number of business leaders, including estranged billionaire brothers Anil and Mukesh Ambani of the Reliance group, have been targeted by anti-corruption campaigners. Both brothers deny any wrongdoing.

Analysts said even modest reforms could help boost investment sentiment, potentially persuading business leaders to begin investing again, especially if interest rates are trimmed early next year.

“Growth falling to around 5 per cent is like zero growth in a more developed economy, given the demographics and the need to create jobs here,” said Ajit Ranade, chief economist of the Aditya Birla Group, one of India’s largest conglomerates.

“But even if they can’t find any really big ticket items, they should go through their closet and dust down the long list of smaller things that don’t [need] parliamentary approval, all of which boosts sentiment and helps to bring in more foreign investment.”

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