Will slow reforms deter investors?4 min read . Updated: 10 May 2010, 07:16 PM IST
Will slow reforms deter investors?
Will slow reforms deter investors?
New Delhi: A lack of progress on reforms during India’s just-ended parliamentary session may have disappointed investors, but accelerating growth and hopes for eventual liberalization will keep foreign funds flowing in.
Hobbled by a socialist old guard, allies wary of reforms and a belligerent opposition, Prime Minister Manmohan Singh’s Congress party coalition opted to go slow on much-awaited reforms during the February-May legislative session as it fended off a no-confidence vote and was distracted by a IPL scandal.
Despite the lackluster performance by government, foreign investors have not stopped pouring in funds.
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Below are questions on the fate of reforms and on why India will remain favoured despite slow progress on liberalization:
What is the government’s record on reforms?
When the reformist Singh’s government was returned to power in 2009 with a stronger mandate, investors cheered in the hope of a stronger push for further opening up the economy.
The record since then is uneven. The government has moved to sell stakes in state-run firms, auction 3G mobile phone spectrum and is on track to roll-out nationwide tax reforms in 2011, although a Goods and Services Tax is behind schedule.
But there has been no move to liberalize the banking, pension and insurance sectors and allow greater foreign stakes in them.
India has not freed controls on prices of fuel and on trade in farm commodities, and foreign multi-brand retailers remain all-but shut out of the fast-growing market.
Even on bills close to Congress’ heart the government has failed to deliver, raising questions about its ability to marshal allies and reach across to opposition in Parliament.
It deferred introducing in the lower house a bill to reserve places for women in Parliament, an initiative personally backed by powerful party chief Sonia Gandhi.
A bill to set caps on operator liability in case of a nuclear accident, key for General Electric and Toshiba’s Westinghouse to enter the $150 billion sector, was introduced on the last day of Parliament and now heads to a parliamentary standing committee where it faces further delay.
What ails the process?
The Congress party includes a strong leftist lobby, which remains suspicious of any kind of opening up of the economy and which could trump the ambitions of Singh and his reformist aides. They argue India must keep a strong hand on industry and markets to ensure growth trickles down to the country’s nearly 450 million poor, and the government must spend more on welfare schemes for the poor.
The leftists have often been backed by Gandhi, who is seen as the last word in the party. Underscoring her leanings and influence, in March she returned to chair a government super think-tank, which had in its earlier version framed a scheme to guarantee 100 days of work for rural poor.
“It’s got this constant debate between the left of Congress and the reformers," said Robert Prior-Wandesforde, senior Asian Economist at HSBC. “The reformers might get a few things through, but for the really big things the left of the party will put its foot down."
Why is India still favoured by investors?
Simply put: size and growth. Asia’s third-largest economy clocks the second-fastest rate of economic expansion in the world, and growth is set to accelerate.
India’s GDP is seen growing at 8.5% in the year that began 1 April, and at 9% in the following year. Policymakers are confident 10% is just around the corner.
Its 300 million strong middle class, with large disposable incomes, is a lucrative market for everything from cosmetics to cars and consumer demand remains strong.
Car sales figures offer an insight into the market and its potential. They have been growing in double digit percentages for 10 straight months, and global auto firms like Toyota and Nissan are stepping up investment in the country.
What is the size of the investment?
Between 1 January and late April, foreign investors poured over $6 billion into Indian stock markets, which amongst Asian economies was topped only by Japan’s $34.4 billion and South Korea’s $9 billion, according to investment bank Macquarie.
Foreign direct investment (FDI) into India in the first two months of this year dipped by 11% to $3.76 billion.
But what of reforms?
Despite the setbacks and halting pace of progress, investors continue to live in hope.
“I think maybe part of it is a religious hope that reforms will come through," Prior-Wandesforde said. “I don’t think they will come, in any significant way, in several years."
The immediate window for pushing through reforms may be closing. Later in the year and in 2011, Congress faces voters in key state election, dampening enthusiasm for painful reforms.
Will lack of reforms sour the mood?
Not in the near term, with most investors having factored in the slow progress. For now, concerns are focused on the record $100 billion government borrowing programme for the year and of the central bank tightening monetary policy to fight inflation.