Need to build investor confidence for sustainable and transformative growth
India’s official statisticians reported a growth of 13.5% in the April to June quarter this year. This means the country has risen to the top spot as the world’s fastest growing major economy – and, incidentally, has replaced Britain as the world’s fifth largest economy.
Unfortunately, this is where the good news about India’s growth prospects ends. Those GDP figures were actually a disappointment, given that the same quarter last year saw India shut down amid its devastating Delta-induced Covid wave; a Bloomberg survey of economists predicted growth above 15%.
Over the past three years, in fact, India’s GDP has grown by just over 3% – and less than 4% since the last quarter before the pandemic. This financial year – which ends in March 2023 – is unlikely to break records: most now expect real growth to fall short of 7%, even from a low base.
If you are looking for reasons to be optimistic, you can find them. For example, capacity utilization in India’s manufacturing sector recently hit 75%, its highest level in nearly a decade. Some economists hope this means the problem that has plagued India’s macro economy for the past decade – anemic private sector investment – will cease to be a constraint to growth. Still, investment figures as a percentage of inflation-adjusted GDP remain below normal, 2.5 percentage points below where they were before the pandemic.
Some Indian officials believe that a return to high investment and growth is only a matter of time, and that positive policy changes in recent years – from indirect tax reform to new industrial policies geared towards domestic manufacturing – will bear fruit in the medium term. But we have heard this phrase many times before.
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If it hopes to return to a strong growth trajectory, India simply cannot afford to give in to complacency. Something crucial is still missing in the country’s policy mix: a good understanding of what investors really need.
In a world marked by rising interest rates and risk aversion, there are still not enough investment projects available in India with the right risk-return profile. A lot of capital continues to flow into India, but mostly from risk-tolerant sources such as private equity, or to companies deemed able to handle political risk such as Adani Enterprises Ltd.
Companies that support job increases and broader economic growth – small businesses or those in the infrastructure sector, for example – are not as sought after. Even global portfolio investors have noted that over the past 10 years, Indian stocks have not produced better returns than the much more transparent US market.
Expanding India’s private sector’s access to capital by reducing environmental risks should be the government’s number one priority going forward. This requires the implementation of reforms that have been well understood and advocated for years, but which have been put on the back burner compared to more high profile subsidies and interventionist policies.
Administrative and judicial reforms, for example, are long overdue. Dispute settlement in India remains a nightmare. According to the World Bank’s Ease of Doing Business Report 2020, India ranks 163rd globally in contract enforcement. It took an average of 1,445 days to resolve business disputes through the court system.
The World Bank has since stopped publishing its independent assessments of the business climate, and the Indian government maintains that these figures have since improved. But investors in India still have a justified fear of going to court. Even the government’s historic bankruptcy process has slowed, with the National Company Law Tribunal saying last month it would only hear “urgent” cases because 30 of its 63 court positions remain vacant.
One way to compensate for the lack of judicial and administrative reforms would be to leave more room for arbitration, including international arbitration. But India has moved in the opposite direction over the past decade, unilaterally exiting bilateral investment treaties and working to strengthen the primacy of domestic courts. These policies are short-sighted and must be reversed.
The global mood has changed. India needs to show investors not only that they can earn decent returns in the country, but that their money is safe here. This requires an entirely different set of reforms than the government has so far been comfortable with. Unless policymakers set about changing the overall risk profile of investing in India, they are unlikely to leverage private investment to the levels needed for sustained and transformative high growth.