Official Indian statisticians reported growth of 13.5% in the April to June quarter of this year. This meant that the country took the top spot as the world’s fastest growing major economy – and, by the way, replaced Britain as the world’s fifth largest economy.
Unfortunately, that’s where the good news about India’s growth prospects ends. Those GDP numbers were actually a disappointment as India closed in the same quarter last year amid the devastating Delta-driven Covid wave; a Bloomberg survey of economists expected growth of more than 15%.
In fact, India’s GDP has grown by just over 3% in the past three years – and less than 4% since the last quarter before the pandemic. This fiscal year, which ends in March 2023, is unlikely to break any records: most now expect real growth not to reach 7% even on a low base.
If you look for reasons to be optimistic, you can find them. For example, capacity utilization in Indian industry recently reached 75%, the highest in nearly a decade.
Some economists hope this means that the problem that has plagued the Indian macro economy for the past decade – anemic investment in the private sector – will no longer hold back growth.
Still, investment figures as a percentage of inflation-adjusted GDP remain below par, 2.5 percentage points lower than before the pandemic.
Some Indian officials believe the return of high investment and growth is only a matter of time, and positive policy changes seen in recent years – from indirect tax reform to new industrial policies targeting domestic production – are in the pipeline. medium term.
But we’ve heard that rule before.
If it hopes to return to a rapid growth path, India simply cannot afford to give in to complacency. Something crucial is still missing from the country’s policy mix: an understanding of what investors really need.
In a world of rising interest rates and risk-out sentiment, there are still not enough investable projects with the right risk-return profile available in India.
Much capital continues to flow to India, but mainly from risk-tolerant sources such as private equity, or to companies deemed capable of managing political risk, such as Adani Enterprises Ltd.
The companies that support job growth and broader economic growth – smaller companies or those in the infrastructure sector, for example – don’t get as much attention.
Even global portfolio investors have noted that Indian stocks have not delivered better returns over the past 10 years than the much more transparent US market.
Broadening the Indian private sector’s access to capital by reducing environmental risks should be the government’s number 1 priority in the future.
That requires the implementation of reforms that are well understood and advocated for years, but that have been put on the back burner compared to more high-profile subsidies and interventionist policies.
For example, administrative and judicial reforms are overdue. Dispute resolution in India remains a nightmare.
According to the World Bank’s 2020 Ease of Doing Business report, India ranks 163rd in the world in terms of contract enforcement. It took an average of 1445 days to resolve commercial disputes in court.
The World Bank has since stopped publishing its independent assessments of the business environment, and the Indian government says these numbers have since improved.
But investors in India still have a legitimate fear of going to court. Even the government’s historic bankruptcy process has slowed to a snail’s pace, with the National Company Law Tribunal saying last month it would only handle “urgent” cases as 30 of the 63 court slots have not yet been filled.
One way to make up for the lack of judicial and administrative reform would be to provide more scope for arbitration, including international arbitration.
But India has shifted in the opposite direction over the past decade, unilaterally abandoning bilateral investment treaties and strengthening the primacy of national courts. That policy was short-sighted and should be reversed.
The global mood has changed. India needs to show investors not only that they can earn decent returns in the country, but also that their money is safe here.
That will require an entirely different set of reforms than what the government has been comfortable with so far.
Unless policymakers work hard to change the overall risk profile for investment in India, they are unlikely to get private investment to the level needed for sustainable and transformative high growth.
(Except for the headline, this story has not been edited by DailyExpertNews staff and has been published from a syndicated feed.)