India eagerly awaits evidence of reform

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By Craig Botham, Emerging Markets economist at Schroders

Following his recent trip to India to meet with companies, government officials and private sector analysts, Craig Botham, Emerging Markets economist at Schroders, shares his findings in ‘A Postcard from India’….

“Faith in Modi”

There remains strong belief in the ability of Prime Minister Modi to push through needed reforms, but it was not difficult to detect a hint of frustration in some quarters at the lack of progress on this front. Nonetheless, it is still expected that progress will be forthcoming.

There seems little denying though that even absent “big bang” reforms, things are improving in India. Businesses spoke positively of the heightened engagement and efficiency of the government bureaucracy, with response times greatly reduced. The scope for further gains here was also highlighted at several meetings, particularly as regards the $300 billion in stalled projects, at least half of which are held up by regulatory or other bureaucratic issues. Land acquisition is a particular problem, accounting for 33% of stalled projects.

Political obstacles to reform

Reforms are being delayed, in part, by the lack of a ruling party majority in the upper house, preventing passage of key bills. For now, the government is attempting to overcome this blockage via executive fiat, issuing ordinances to enact reforms on a short-term basis. But with a six month life span these are not providing sufficient assurances for investors. Prospects for corporate capital expenditure, and hence growth, are also limited by low capacity utilisation (currently around 65%); a problem only economic growth can address. In general, the repeated refrain was that India has seen a qualitative but not quantitative change, and that things must change “on the ground” before investment will revive.

Again though, there was confidence that key measures could be passed, despite the obstacle posed by the upper house. The government would hold a majority in a combined session of the upper and lower houses, and so could pass a bill by calling such a session – though this requires the upper house to have blocked the bill first. It is not an ideal method, and should be used sparingly to preserve political capital, but will mean the government is able to press ahead with the more important reforms, including land acquisition reform.

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