In India “it takes an economic crisis” to get politicians to implement potentially painful economic measures, says The Economist. Prime Minister Manmohan Singh, who unleashed rapid growth in the 1990s when he liberalised the economy, is now attempting another “rush of reforms”.
Annual growth has slumped to 5%. The global slowdown hasn’t helped. Nor has India’s stubbornly high inflation, which has prevented the central bank from cutting interest rates. But a key problem has been a fall in investment, which is a direct result of the government backsliding on its recent reform efforts. This has put off foreign investors and created uncertainty. Government overspending has also crowded out the private sector.
The government is now set to cut fuel subsidies and sell some state-owned companies to trim its deficit. Foreigners will be allowed to invest more heavily in India’s power and airline sectors, while the retail industry is being liberalised. Foreign chains will be allowed to own up to 49% of multi-brand outlets.
This reform was stymied last year by strong opposition from small shopkeepers. States can choose whether or not they want to implement it. That should “weaken the opposition of regional parties”, says the FT. “The bet is that when they see the benefits being enjoyed by those states that do reform, they will want to join in.” The prize here is an end to expensive food, as The Economist points out. Improved logistics and technology from foreign expertise should cut prices.
The changes do not need parliamentary approval, and the governing coalition looks more united than in the past, says Satarupa Bhattacharya on Reuters. It could lose allies in parliament, which could force early elections, but the government has clearly concluded that this is a risk worth taking.
Even if implemented successfully, the reforms won’t revive India’s growth overnight, says Capital Economics. Labour-market reform and faster infrastructure investment will also be needed. However, “in facing up to those who oppose its reform agenda, the government has sent a strong signal to investors”, says the FT. The long-term story remains compelling. Our favourite India play, Aberdeen’s New India Investment Trust (LSE: NII), still looks good value on a discount of 9.4%.