As political wrangling casts a shadow over the recent economic reforms, investors are now hoping that their flush of optimism in September when the reforms were announced was not too hasty. In the days following the announcement, India’s markets reflected the enthusiasm felt globally for the changes. Here in London the reaction was one of surprise followed by real hope that more will follow.
Now, once again we will wait and see what the pace of change will be, whether the government will be successful in its desire to open up the retail and aviation sectors among other things, and what this means for India’s business with the rest of the world.
Of course the view from London is that these reforms are a good thing and long overdue. Most importantly they are a first step and a clear signal that Prime Minister Manmohan Singh wants to increase confidence in the Indian economy. What must happen now is that the announcements need to be followed by real action and a commitment to make them a reality, so that these first steps become strides. It is encouraging that Prime Minister Singh has vowed to press ahead with the reforms: much of India’s growth over the past few years has been domestically driven, in part due to strong population growth. This home-grown demand has served it well, but India would now benefit from foreign capital flows, something which opening up the retail and aviation sectors will bring.
These reforms would be positive across the spectrum of Indian society: in the first instance they will create jobs, as well as increase competition and drive down costs for consumers. Competition is sometimes viewed with suspicion, but our experience in the City of London is that it serves to improve the market by driving efficiency through a desire to be the best in an ever expanding field. We have found that competition is a good thing and something which has enabled us to become a world-leading financial centre.
Of course these measures alone are not the end of the story—a few multinational companies entering the market will not transform India, but if the reforms are implemented it will send out a clear and strong message to investors that the Indian government is prepared to take action at a time when its economy is slowing. They will hugely increase confidence that the Indian government really is committed to a future where India is an enthusiastic partner in the global economy.
It is completely understandable that India has taken a gradualist approach to opening up its markets, particularly given the global economic events of the past few years and the view that India’s conservative approach led to it being protected from the downturn. But the world is moving on and investors now want to see real action across all areas of the Indian economy not just in aviation and retail, action which could help India regain its growth momentum and help meet its infrastructure development goals.
There are a number of pending reforms which will help make India a more attractive destination for foreign investors: In particular, sectors such as banking and insurance await the passage of Bills which will help provide an enabling environment for the growth and development of these areas.
The Banking Amendment Bill will be a valuable reform, enabling banking to expand and bringing legislation up to date to reflect the impressive growth of the sector. The Insurance Amendment Bill will allow Indian insurers to access the necessary capital to grow and enable them to further their reach to Indian individuals, households and companies.
Finally a real commitment to improving infrastructure will also ensure India’s growth as an economic power is not hampered. The challenges in this area are well documented: maintaining a supply of bankable projects; transparency in the bidding and awarding processes of PPP projects; issues around regulatory and land clearances; availability of the right kind of long-term debt; and taxation issues.
The Indian government has shown that it recognizes these challenges, but it can go further and continue to encourage participation by foreign firms and make projects more attractive to private investors whether from home or abroad by exploring ways of mitigating regulatory uncertainty and finding innovative ways to encourage infrastructure investment.
And there are a host of others, including stamp duty and goods and services tax, which can help standardize, simplify and streamline business environment which would bring further growth and investment for the Indian economy.
I am well aware that change takes time and that politicians are quite rightly conscious of how reforms may affect everyone but it is clear that the process of reform will benefit every strata of society and help India to regain its growth momentum.
I hope that the Prime Minister is successful in his drive to make them become a reality.
The Lord Mayor acts as the ambassador for UK-based financial services and spends around 100 days of his year visiting more than 20 countries. The Lord Mayor, the City of London, UKTI and the UK Treasury work in partnership to promote UK financial services.
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