Wednesday, August 22, 2012

GEORGE WORTHINGTON, CHIEF ECONOMIST, ASIA – PACIFIC IFR MARKETS, THOMSON REUTERS

Bold but politically unpalatable reforms such as freeing up the labour market are necessary to permit a higher rate of sustainable, non-inflationary growth

Most important for sustaining rapid growth over the medium term is increased spending on infrastructure. While the dire fiscal situation precludes anything like the massive state-driven outlays on roads, rail, ports and airports seen in China, the private sector is picking up some of the slack as new roads and other facilities in major cities demonstrate. Billions of dollars’ worth of investment being undertaken by mobile telecoms providers reflects confidence in India’s growth story. Access to foreign capital by Indian firms will be crucial to fund booming investment over the next decade. Further liberalisation of the foreign investment regime is likely to progress only slowly, and there is a risk that rising inflows provoke tighter regulation or controls as the authorities focus on the currency.

Another potential barrier to sustained investment growth is the public-sector’s massive deficit. The government’s funding requirement, if not brought under control, risks crowding out private-sector capital expenditure. Pending tax reforms and revenue from sources such as the recent spectrum sale will help narrow the budget gap, but a stronger commitment to reforming the state sector and further disinvestment is needed to ensure a sustainable fiscal position in coming years.

Faster trend growth in the economy would help also improve the government’s balance sheet, and though the way to that goal is clear, the will is not there. Bold but politically unpalatable reforms such as freeing up the labour market are necessary to permit a higher rate of sustainable, non-inflationary growth. For the governing coalition, such issues are likely to be put in the too-hard basket for now. But even without such positive developments, the next few years should see the Indian GDP expand by an average of at least 8% on the back of solid private investment and rising consumption. In that context, local markets and investment opportunities will prove attractive for international investors; attracting capital for a virtuous cycle of growth and investment will not be a problem for India’s increasingly dynamic economy.


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