To keep growing, India needs reform update

Observers say there's only one way to arrest India's economic slowdown: reforms, reforms and more reforms.
In pre-liberalisation years, a telephone connection in India was considered a luxury. Today, the country is in the midst of a cellular boom. Rupak De Chowdhuri / Reuters
In pre-liberalisation years, a telephone connection in India was considered a luxury. Today, the country is in the midst of a cellular boom. Rupak De Chowdhuri / Reuters

In 1991, India changed forever.

The country, caught for decades in a socialist time warp, began easing key government controls in favour of neo-liberal reforms, unshackling private-sector enterprises from its labyrinthine bureaucracy.

Several key sectors including telecommunications, retail, and insurance were opened up to foreign investors. Many policies that stifled growth were gradually reversed: the government reduced export subsidies and import barriers to enable free trade; scrapped the industrial licensing regime; and did away with multiple permits and the accompanying red tape that gave rise to a cumbersome system derisively referred to as the "licence raj".

The policy shift ended the dark days of the lumbering "Hindu rate" of growth - a derogatory expression commonly used for the low annual growth rate of the socialist economy - and catapulted India on to what Goldman Sachs described as the "growth expressway", with an average 8 per cent GDP.

But as India this year marks two decades since liberalisation began, observers say the reforms have lost their momentum.

With sky-high inflation, falling industrial production and renewed warnings of a double-dip recession across the US and Europe, India's economy faces the prospect of a sharp slowdown. Observers say there is only one way to arrest the slowdown: reforms, reforms and more reforms.

The policy changes introduced since 1991 have lifted millions of Indians out of poverty.

They unleashed a new era of unbridled consumerism. In pre-liberalisation years, a telephone connection - which took months, sometimes years to get - was considered a luxury. Today, the country is in the midst of a cellular boom with more than 800 million mobile phone subscribers. Back in the day, Fiat and Ambassador were the only two car models manufactured in India. Now a slew of global car makers are setting up shop in India as the country emerges as one of the world's fastest-growing car markets. Until the 1990s, the national carriers Air India and Indian Airlines were the only passenger airlines. Now they compete with private carriers such as Jet Airways, Kingfisher and Indigo, offering competitive prices and services to flyers.

But a lot remains unchanged. Doing business is still cumbersome because of stringent regulatory hurdles, archaic tax systems, restrictive labour laws, derelict infrastructure and government corruption.

In a report titled Doing Business 2011, the World Bank says India moved up just one rank from a year earlier to emerge as the 134th easiest country in which to do business.

Analysts often draw parallels with its Asian rival China, which despite being a relatively illiberal, one-party autocracy manages to attract greater foreign investment than India, the world's largest democracy.

With its smooth and fairly hassle-free process of granting approvals, China earned foreign direct investment worth US$90.03 billion (Dh330.69bn) last year, nearly three times more than India, which pulled in $34.6bn.

The advisory firm Macquarie says that about 80 government bills have been pending before the Indian parliament for more than two years, some of them critical to steer the country away from an economic slowdown.

Foreign companies have long urged India to liberalise its fast-growing insurance market. At the moment, the Indian government permits joint ventures, with a foreign company holding a maximum 26 per cent stake. Companies have demanded for the limit to be raised to 49 per cent.

Global retail giants such as Walmart, Carrefour and Tesco are keen to tap into India's fast-growing consumer market, but the sector remains heavily regulated with strict limits on foreign investment. Foreign investors are allowed to own up to 51 per cent of single brand retails - stores that sell products of one brand only. That means foreign retailers are allowed to operate only in partnership with an Indian subsidiary. For years, they have been pushing for government approval of foreign investment in multi-brand retail, which will allow them to sell directly to the Indian consumer. But the Indian government has not responded favourably so far.

About 70 per cent of industrial projects in India are in limbo because of disputes with farmers, says "India Infrastructure - Paving the Way for India's Growth", a report released last year by Ernst & Young. Land disputes have endangered investments worth $100bn across the country, says a 2009 report by the lobby group Associated Chambers of Commerce and Industry of India.

The government has vowed to repeal an old land acquisition law enacted by the British in 1894, but it is not clear when that will happen.

Businesses are also critical of several policy initiatives.

The Reserve Bank of India has raised key interest rates 11 times since March last year to combat double-digit inflation, a politically sensitive issue that has previously voted several incumbent governments out of power.

Tata Steel, owned by the $70bn Tata group, is very critical of the government approach of repeated interest rate hikes.

"India's fiscal policies to control inflation will affect access to credit and could slow down investment levels as well as consumer demand," it said in its annual report.

It also warned against the country's abysmal infrastructure.

"The most significant impact [on economic growth] will be from the slowdown in major infrastructure projects in the areas of road construction, mass transit systems, power generation and investments in primary industries, where financial closure, right-of-way permissions and land acquisition could present major delays."

The country's telecoms sector has witnessed explosive growth in recent years, with the industry adding 17 million new subscribers each month. But the sector's growth remains inhibited, observers say, by an archaic telecoms policy introduced more than a decade ago.

"A new national telecoms policy is long overdue," says Rajat Kathuria, a professor of economics at the International Management Institute in New Delhi and a former consultant with the Telecom Regulatory Authority of India. "Many changes have taken place since the current policy was formulated."

But there is a broad consensus that the biggest evil confronting businesses is corruption.

In November, the telecoms minister A Raja was forced to resign and eventually arrested amid allegations that in 2008 he sold licences for second-generation mobile frequencies at throwaway prices to companies he favoured, resulting in a revenue loss to the exchequer of up to $40bn. He denies the allegation, but the high-profile case has deterred business confidence, analysts say.

"The key challenge is to bring transparency in the regulated area of policymaking," says Amit Mitra, the secretary general of the Federation of the Indian Chambers of Commerce and Industry. "Wherever minute discretion in decision making is involved, policies become prone to misuse and corruption. They act more as roadblocks than guidelines."

Published: August 21, 2011 04:00 AM


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