Indian economy needs Manmohan to
reform By Priyanka Bhardwaj
NEW DELHI - Just when the Indian
government is being pursued by top bankers,
representatives of mutual funds and the insurance
sector to make its policies more constraint free,
US President Barack Obama has made subtle
suggestions that India needs to unleash a second
wave of economic reforms to make it more globally
competitive when its investment climate is fast
deteriorating.
Obama conceded last Sunday
that "it is not the place of the United States" to
tell India "how to chart its economic future -
That is for Indians to decide", yet his remarks
encapsulated both the concerns of American
businesses and their intent to bet big in the
South Asian nation if the environment were made
more conducive to investment.
He noted how
innovation and job creation are stifled by corruption
that would have to be
fought by global partners and not just by a
handful of leaders of the most advanced economies.
He also pointed out that at the recent Group of 20
summit in Mexico nations on both extremes of the
development spectrum conferred on sharing roles
that would touch more than a billion people.
Big investors preparing to quit India
include New York Life, US mutual fund giant
Fidelity Worldwide Investment, French telecoms
giant Augere Wireless and German airline operator
Fraport AG. Foreign telecoms companies that have
had licenses cancelled include Etisalat of Abu
Dhabi and Bahrain Telecommunications Co. Norway's
Telenor is fighting cancellation of its license
for cutting prices. Augere plans to sell its 4G
spectrum in India and has halted all activities in
the country. New York Life and Fidelity Worldwide
Investment have sold their Indian units. Fraport,
which opened an India office in 2006, is getting
rid of its 10% stake in New Delhi Airport in which
it is an operating partner till mid-2013. Still
hanging on is Vodafone as it fights against the
imposition of tax worth billions of dollars.
These firms have experienced
disappointment in India due to regulatory
uncertainty and policy gridlock. Ansgar Sickert,
head of Fraport's India operations claimed this
month that the embattled United Progressive
Alliance government lacked "any spine or drive" as
it held back from introducing any reform measures.
Nomura in a July report indicated a steady
outflow of foreign funds from the country (US$3.1
billion in 2009, $7.2 billion in 2010 and then
$10.7 billion in 2011), while the Centre for
Monitoring the Indian Economy, an independent
economic think tank headquartered in Mumbai, said
in May that projects worth 5 trillion rupees ($90
billion), including some in the power and steel
sectors, have been held up for a variety of
bureaucratic reasons.
The United Nations'
latest "World Economic Situation and Prospects"
mid-year update warns of increasing turmoil in the
financial markets and risk aversion in 2012 and
2013 that could lower South Asia's economic growth
to 5.6% this year, from 6.1% in 2011, and India's
expansion rate to 6.7% from 7.1% last year.
A shortage of liquidity has been a chief
culprit for the decline in India's GDP to a
nine-year low of 6.5% in the fiscal year that
ended in March 2012 and a current account deficit
reaching 4.2% of GDP, which has led to a weaker
rupee - down by almost 25% against the US dollar
in the past 12 months.
India's political
and industrial classes claim that Obama's
observations are no more than rhetoric designed to
win favor with big business in the run-up to the
November presidential election. Corporate Affairs
Minister Veerappa Moily immediately debunked the
US president's concerns, saying they emanated from
misrepresentations of the Indian story by
disgruntled transnational groups such as Vodafone.
The Indian government, attempting to safeguard its
tax base, is targeting firms that effectively pay
taxes nowhere - that is, companies are being
obliged to pay tax on capital gains if they make
any profit in India even when their ownership
changes hands in tax havens. This applies to
British mobile-phone firm Vodafone, which has
bought a controlling stake in India's Hutchison
Essar for over $11 billion. The company will have
to pay tax as the deal involves an Indian asset.
Moily also underlined India's "strong
economic fundamentals", in contrast to the
collapse of several US banks during the 2008 and
2010 financial crises.
"Once the
perception of a few individuals, entrepreneurs and
investors is removed, [I] think in two to three
months we will be back again with a kick-start to
pick up the same speed [of economic growth] as we
had in the last decade," Moily said.
In
the past decade, India has registered annual
growth of 8-9.5%. Moily said that if not for
economic crisis in the US and Europe, the
country's economic expansion would have crossed
10%. "That is the potential of India, which we can
recover immediately by taking some remedial
steps," he added.
If taken in the right
spirit, Obama's message endorses a new direction
for a developing economy whose leading companies,
from telecoms outfit GTL Infrastructure and
computer peripherals maker Moser Baert to national
carrier Air India, are restructuring to shed
excess and focus on their core businesses.
As the eurozone suffers from its debt
hangover and the United States verges on another
recession, Indian businesses are looking to
expand. Mahindra, whose interests range from
tractors to aircraft, last year bought a 70% stake
in South Korean automaker Ssangyong Motor for $378
million. It is now looking to buy US-based Hawker
Beechkraft - though it may yet lose out to
Chinese-government owned Superior Aviation Beijing
Co. Chennai-based industrial group Archaen wants
to buy 85% of Polish sulfur mining firm Siarkopol
SA.
India's financial and equities markets
are meanwhile attracting overseas interest. London
Stock Exchange this month bought 5% of Delhi Stock
Exchange. French retailer Groupe Auchan has
established a 50:50 venture with Dubai-based
Landmark to open 85 stores in India over the next
six years. The US's State Street Bank is in talks
to partner ICICI Bank in a securities custody
business, while the growing spending power of
India's expanding middle classes is encouraging
Coca Cola to invest $3 billion in India over the
next eight years and Swedish home furniture giant
Ikea to spend $1.87 billion on 25 stores across
the country.
India's ruling United
Progressive Alliance coalition has so far spent
its second term since 2009 overusing the ruse of
India's rights of sovereignty in policy making -
for instance severely restricting the advance of
multinational "big box" retailers in local markets
- and catering to populist demands rather than
setting in motion long-yielding reforms.
But once India's presidential elections
are concluded this month, Prime Minister Manmohan
Singh, who last month also took on the job of
finance minister, will need to deliver on his
oft-repeated economic assurances.
With a
little help from lower global crude oil prices,
more macro-economic fixes will be required to
solve underlying problems. Until then, India's
economic lure will remain sentiment driven.
Priyanka Bhardwaj is an
independent journalist and risk analyst based in
Gurgaon/New Delhi, India. For more details, see here.
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