Logjams hurt India story

India is the world's second fastest growing economy, and the hottest market after the rise of China, but the promise that it spurred among investors and entrepreneurs is now choked. Gaurav Choudhury reports. Scandals hobble reformist drive

business Updated: Jul 16, 2011 02:06 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times

India is the world's second fastest growing economy, and the hottest market after the rise of China, but the promise that it spurred among investors and entrepreneurs is now choked.

As an embattled government fights a barrage of criticism for a series of scandals, investors appear increasingly worried that the United Progressive Alliance (UPA) government will not push through policy reforms in critical areas to boost long-term growth.

The World Bank's "Ease of Doing Business” ranks India at a lowly 134 among 183 countries. India fares poorly on key respects including enforcing contracts.

Last month, Prime Minister Manmohan Singh brushed aside widespread accusations of policy paralysis, but foreign and domestic investors aren't convinced.

"I think the market will be looking for actions rather than comments," said a top executive at a foreign bank. Confidence can come back only when there is perceptible movement in the policy stance."

Last month, finance minister Pranab Mukherjee heard it straight from the US administration and investors as to what they want the Indian government to do: quicker and faster reforms in critical areas such as banking, insurance and retail trade.

"I think, from our perspective, the key thing is the outlook for economic reform. This is true in the United States – fiscal and economic reform, but also true for India as well," US Treasury Secretary Timothy Geithner had said.

Investors want hassle-free entry into the Indian economy and the recent corruption scandals appear to have blurred the government's focus away from key reforms.

"In our view, pressure to tackle the twin issues of corruption and inflation has diverted the focus from expediting reforms," said a senior executive at a US-based fund house, who did not wish to be identified.

British Prime Minister David Cameron, who had visited India last year, had written to Prime Minister Manmohan Singh expressing worries about unpredictable government decisions, which could potentially harm British companies doing business in India.

Cameron cited the tax demand on Vodafone of around $2.5 billion (about R11, 250 crore), delays in government approval for Cairn Energy's deal.

The deal involved the sale of its Indian subsidiary to the London-listed Vedanta Resources controlled by NRI billionaire Anil Agarwal and the issue of unpaid bills due to British companies who worked on last year's Commonwealth Games held in Delhi. Experts said there is growing sense of unease in relations between the government and corporate world.

"If there is a deficit that needs to be breached immediately, it is the trust deficit that is beginning to creep up between the government and corporate India," Kotak Institutional Securities said in a recent research report.

"For any effective development to take place and to provide investors with confidence that the projects they back will see the light of the day, the government needs to work as one cohesive body with a set of rules clearly laid down."

Amid these noises of despair, there are also voices of optimism.

"I think it is unfair to say that there is policy paralysis in India," said Nilesh Shah, president, orporate banking, Axis Bank.

"There is no point of having a policy action like the one seen in the Western world which has brought their countries on the verge of defaults and despair." Shah said.

As the government walks the tightrope between public accountability and reformist action, the challenges ahead are indeed tough.
(With inputs from Sandeep Singh)

Scandals hobble reformist drive

First Published: Jul 15, 2011 21:02 IST