New Delhi: After a year of global economic crisis and political limbo, investors in India are returning to business as usual — this time with real hope that a new government might actually bring in needed financial reforms.
The word “reform” has been touted in India for years but if discussions at the World Economic Forum are anything to go by, Asia’s third-largest economy may have turned a corner with its political will to help it reach 9-10% growth rates.
With the re-elected Congress-led government freed from the shackles of communist support, reforms from foreign investment in retail to recycling India’s $400 billion in domestic savings to help fund infrastructure projects were seen as real possibilities.
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Aside from 2005-2008 when India’s economy expanded by more than 9% annually, the Asian giant has struggled to keep up with China’s breakneck growth, hampered by infrastructure bottlenecks, red tape and an often plodding financial system.
“There is now political stability,” said Saurabh Agrawal, head of investment banking for Bank of America Merrill Lynch in India. “The government is making the right noises and it looks like there is political will.”
Congress’s May general election win, recent state victories and a weak opposition have freed the hands of reformists in the government, including Prime Minister Manmohan Singh.
“India is in a sweet spot,” one senior banker said, as the centre of gravity over the last year has leaned towards emerging economies, while Western economies struggled to stay afloat.
“If you want a high rate of return, where would you invest? Europe? Brazil? Russia? China?” he added, referring each time to their economic or regulatory problems. “India does stand out.”
Singh set the tone on Sunday, saying that clear signs of an upturn in the economy were laying the path for the expansion of long-term debt markets, deeper corporate bond markets, stronger insurance and pension sectors, and improved futures markets.
At a host of conference sessions, calls for reform resonated around the rooms -- foreign investment in universities, making highway concessional contracts better for private investors, changes to quicken court cases over contractual disputes.
Investors have also been buoyed by plans this week to sell stakes in profit-making state companies.
Many said they had heard all this before.
But there appeared genuine optimism that Singh and economic policymaker Montek Singh Ahluwalia, architects of India’s ground-breaking market opening in 1991, now have the clout to fend off political pressures.
Cutting the knot
For many investors, financial reform could be the sword to cut the gordian knot.
India’s savings rate is nearly 40% of GDP, but a restrictive and underdeveloped financial system means little is funnelled to capital markets to help fund, for example, the $20 billion a year the government wants to raise for highways.
Robert Morrice, chairman and chief executive of Barclays Asia Pacific, pointed out that around 40% of India’s household savings was invested in physical assets like gold -- hardly the stuff of productive investments.
The government plans to introduce in Parliament by December long-delayed bills proposing raising foreign stake limits in the pension and insurance sectors.
“To get 9-10% growth rates, India will need reform,” said Kevan Watts, head of Bank of America Merrill Lynch in India. “They have to ensure domestic capital flows into investments.”
But participants warned that there were also far deeper problems to solve -- higher hanging fruits for a government apparatus that is notoriously slow and bureaucratic.
“Less than half of India has access to a bank account,” said Kalpana Morparia, chief executive officer of J P Morgan in India. “It’s not just about insurance and pensions.”
Getting India’s obsolete infrastructure moving, and helping reduce growth bottlenecks, was for many the biggest challenge. The government has said it needs to spend $500 billion in the five years through 2012 on infrastructure.
But many question whether the Congress party, beholden to a rural base wary of change, can carry out bold reforms. And officials admitted there was little chance that India could emulate China’s quick building of roads, ports and airports.
“We are not only the loudest democracy, but the rowdiest,” said Kaml Nath, the transport minister.