India’s official statisticians reported growth of 13.5% in the April-June quarter of this year. As a result, the country stormed into first place as the world’s fastest-growing major economy – and incidentally replaced Great Britain as the world’s fifth-largest economy.
Unfortunately, that’s where the good news about India’s growth prospects ends. Those GDP figures were actually a disappointment given that India was shut down in the same quarter of last year amid its devastating Delta-fueled Covid wave; a Bloomberg poll of economists expected growth of over 15%.
In fact, India’s GDP has grown a little over 3% over 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 to fail to reach 7%, even from a low base.
If you’re looking for reasons to be optimistic, you can find them. For example, capacity utilization in Indian manufacturing recently hit 75%, the highest level in almost a decade. Some economists hope this means the problem that has plagued India’s macroeconomy for the past decade – weak private sector investment – will cease to be a drag on growth. Still, investment figures as a percentage of inflation-adjusted GDP remain below face value, 2.5 percentage points below pre-pandemic levels.
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 a new industrial policy focused on domestic manufacturing – The medium-term will bear fruit. But we’ve heard that line a number of times.
If it hopes to return to a high growth trajectory, India simply cannot afford to succumb to complacency. Something crucial is still missing from the country’s policy mix: a proper understanding of what investors really need.
In a world of rising interest rates and risk-off sentiment, there are still not enough investable projects in India with the right risk/reward profile. Capital continues to flow into India, but mainly from risk-tolerant sources such as private equity, or towards companies believed to have the ability to manage political risk, such as Adani Enterprises Ltd.
The companies that support job growth and broader economic growth – such as smaller companies or those in the infrastructure sector – receive less attention. Even global portfolio investors have noted that Indian stocks have not produced better returns than the much more transparent US market over the past 10 years.
Expanding India’s private sector access to capital by reducing environmental risks should be the government’s top priority going forward. This requires the implementation of reforms that are well understood and advocated for years, but have fallen behind in comparison to more visible subsidies and intervention policies.
Administrative and judicial reforms, for example, 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 for contract enforcement. It took an average of 1,445 days to resolve commercial disputes in court.
The World Bank has since discontinued its independent business climate assessments, and the Indian government claims these figures have since improved. But investors in India still have legitimate fears of legal action. Even the government’s landmark bankruptcy process has slowed to a crawl, with the National Company Law Tribunal saying last month it would hear only “urgent” cases as 30 of its 63 court seats remain vacant.
One way to compensate for the lack of judicial and administrative reforms would be to give more space to arbitration, including international arbitration. But India has moved in the opposite direction over the past decade, unilaterally denouncing bilateral investment deals and trying to strengthen the primacy of domestic courts. This policy was short-sighted and should be reversed.
The global mood has changed. India not only needs to show investors that they can earn decent returns in the country, but that their money is safe here. This requires a completely different package of reforms than the government has previously preferred. Unless policymakers change the overall risk profile for investing in India, there is little chance they will bring private investment to the levels needed for sustainable and transformative high growth.
More from other authors at Bloomberg Opinion:
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• Could India be drawn into the same spell as Russia?: Pankaj Mishra
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Mihir Sharma is a columnist for the Bloomberg Opinion. He is a senior fellow at the Observer Research Foundation in New Delhi and the author of Restart: The Last Chance for the Indian Economy.
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