US praises Rajan’s monetary stewardship

A month after Prime Minister Narendra Modi’s visit to the US, Washington said his government was slow in pushing economic reforms other than foreign direct investment (FDI) liberalisation, but it lauded Reserve Bank governor Raghuram Rajan for his “monetary stewardship”. It also joined many critics of the new methodology of calculating gross domestic product, saying India’s GDP growth might be overstated.

However, US Department of State in a report on Tuesday praised the Modi government for liberalising the FDI regime and its efforts to improve India’s ranking in the ease of doing business by the World Bank. The report, prepared by the Bureau of Economic and Business Affairs, was titled Investment Climate Statements for 2016.

As the government looks for replacement of Rajan, US State Department said: “The monetary stewardship of Raghuram Rajan, the respected governor of the Reserve Bank of India, further boosted investor sentiment.” The comment referred to the time when the new government had just come to power in 2014.

The report said, “The government has been slow to propose other economic reforms (than FDI liberalisation) that would match its rhetoric, and many of the reforms it did propose have struggled to pass through Parliament,” US State Department said in its report.

This has resulted in many investors retreating slightly from their once forward-leaning support of the Bharatiya Janata Party-led government, it said. It cited the instance of the government failing to muster sufficient political support on a land acquisition Bill in Parliament that ended its chance of passage of the legislation in the near term. “(It) is still negotiating with Opposition parties the details of a goods and services tax Bill, which if not watered down in negotiations, could streamline India’s convoluted tax structure and provide an immediate boost to GDP,” the US State Department said.

It also expressed doubts, like many others, over India’s economic growth of 7.6 per cent in 2015-16. “Ostensibly, India is one of the fastest growing countries in the world, but this depressed investor sentiment suggests the approximately 7.5 per cent growth rate may be overstated.”

There are few quick fixes to the structural impediments, poor regulatory environment, tax and policy uncertainty, infrastructure bottlenecks, localisation requirements, restrictions in many sectors, and massive shortages of electricity that hinder India’s economic growth potential, the report noted.

Recognising that the gains from a massive, positive terms-of-trade shock due to lower oil prices that India has benefited from might not be repeated in the current global economic environment, the finance ministry slightly reduced the official growth outlook for next year, it said.

The finance ministry in Economic Survey for 2015-16 has projected the economy to grow by 7-7.75 per cent in the current financial year. The lower band of the range is 0.6 percentage points lower than what was recorded in 2015-16, while the upper range is just 0.25 percentage points higher.

The report has positive things as well to say about the Modi government. For instance, it said the government has continued to relax FDI restrictions in a wide variety of sectors as part of its efforts to further open the economy.

“Most recently, the government approved up to 100 per cent foreign investment in civil aviation, defence, certain sectors of e-commerce, and the pharmaceutical sector,” it said. Additionally, the government eased requirements for some retailers to source “state-of-art” technology in India could be particularly beneficial to high-tech companies such as Apple, although underlying supply chain constraints remain, it added.

The report has also noted that the Modi government has prioritised economic growth to fulfil its electoral promises and to address the Indian electorate’s high expectations. Initially, the government focused on streamlining bureaucratic decision making and raising FDI limits in certain sectors — including defence and railway infrastructure.

It noted that Modi called for foreign and domestic companies to support his signature initiative, Make in India. He also set a goal for India to rise rapidly in the World Bank’s Ease of Doing Business rankings, it added.

The report cautioned US investors that India’s political system was highly decentralised and they must be prepared to face varied political and economic conditions across 29 states and seven Union territories, including differences in the quality of governance, regulation, taxation, labour relations, and education levels.

“Although India prides itself on its rule of law, the country ranks 178 out of 189 in the World Bank’s Ease of Doing Business Report in the category of Enforcing Contracts. Its courts have cases backlogged for years, and by some accounts more than 30 million cases could be pending at various levels of the judiciary,” the US State Department said.

It also listed opportunities that investors could get in India in the long term. “Despite the challenges, the opportunities are immense for foreign companies operating in India, although many highlight that success requires a long-term planning horizon and a state-by-state strategy to adapt to the complexity and diversity of India’s markets.”

India’s infrastructure needs are estimated at $1.5-2 trillion over the next five to seven years, offering excellent opportunities for US companies to participate in India’s development, provided appropriate mechanisms for financing are developed, the report noted.

US praises Rajan’s monetary stewardship

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