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18 December, 2012

Price of economic reform

BRP Bhaskar
Gulf Today

Encouraged by recent government measures indicating a new resolve to forge ahead with reforms, which were held back under political compulsion, foreign analysts and investment brokers last week held out before India visions of a new phase of rapid economic growth.

In a recorded conversation with JP Morgan Chase International chairman Jacob A Frenkel, Stanford University economics professor Nicholas Bloom said India has the potential to grow at least as fast as China if it sorted out domestic problems like labour regulations, the permits system, restrictions on trade and foreign direct investment (FDI) and “a horribly ineffective court system.”

Arjun Singh, Senior Economist at the India office of a firm which claims to be the world’s leading source of business information, said in a newspaper interview that the country could not leverage its large fundamental growth drivers because of lack of reforms. He expected a turnaround in the economy by the middle of 2013 if the government carried forward the reform process.

While India’s demographics give the best potential GDP growth rate, inability to introduce effective policy change is a persistent source of disappointment, said Golden Sachs Asset Management Chairman Jim O’Neill in a note distributed to the media. Based on signs of change in the government’s approach, he hinted at the country doing better than expected in the coming year. The US National Intelligence Council’s forecast, released on December 10, was music to Indian ears. In the once-in-four-years Global Trends report, it averred that by 2030 Asia, mainly India, would straddle international commerce and dominate the world economy, as was the case before 1500 CE.

With the Chinese economy decelerating and the West in decline, India will have the chance to power the world after 2015, it said. Although China is ahead at present, India will be able to close the gap and forge ahead of it. While China’s working population will peak to 994 million by 2016 and decline to 961 million by 2030, India’s will continue to grow until around 2050. Also, India will have more middle-class consumers than China.

The reports about the bright future that awaits India are apparently intended to goad the government into going ahead with reforms.

World Bank Chief Economist Kaushik Basu, who is a former chief economic adviser to the Indian government, chipped in with an exhortation to keep up the blitz of reforms as it will help the economy, which slipped this year to the lowest growth rate in a decade, to return to the nine per cent growth recorded earlier.

More reform measures will certainly please foreign and domestic investors. But the poor will have to pay a heavy price for it. Not surprisingly, this fact does not figure in the experts’ forecasts.

After years of hesitation, the government recently allowed FDI in multi-brand retail trade and raised the FDI cap on insurance and aviation sectors, overlooking the objections of some of the parties supporting the ruling coalition. When the opposition challenged the retail FDI decision in parliament it had a tough time cajoling these parties to vote with it or stay out.

Last week the government decided on two more measures to address foreign investors’ complaints of bottlenecks. It set up a Cabinet Committee to grant swift clearance to projects with investment of over Rs10 billion. It also approved the draft of a new land law to facilitate quick acquisition of land for industries.

Besides promising farmers higher prices for their land, the new law will enable companies to buy contiguous property if 80 per cent of the owners agree to sell. In the case of projects involving public-private partnership, the assent of 70 per cent owners will suffice.

With farmers refusing to give up their lands and tribals resisting eviction from their traditional homelands, several big projects have run into difficulties. Since the land issue involves a large number of small and marginal farmers, many political parties will find it difficult to go along with the government.

In the circumstances, the bill to amend the land law is bound to meet with stiff opposition in parliament. This will call for more arm-twisting than on the FDI issue. The parties will have to weigh how their stand will affect their prospects in the parliamentary elections due in 2014. If the government is defeated on a crucial legislative measure like this it will have no option but to bow out.--Gulf Today, Sharjah, December 18, 2012.

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