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No quick fix to revive India's economy: experts

New govt may have limited scope for positive policy action, they say

[SINGAPORE] Despite euphoric hopes, as reflected in a frothy stock market, it will be difficult for a new government to revive India's economy in a hurry, according to experts - although business confidence could get a boost and there may be limited scope for positive policy action.

With exit polls pointing to a high-margin victory for the opposition Bharatiya Janata Party (BJP) led by Narendra Modi, hopes are running high that a decisive, business-friendly government with a clear mandate will take charge in New Delhi after the election results are announced on May 16. In recent months, India's stock markets have responded enthusiastically to the growing perception of a BJP victory. The Sensex has risen by about 18 per cent from its year-low reached on Feb 13 and is currently at a record 23,871.23 points.

But a number of experts caution against the euphoria.

In an interview with BT, former governor of the Reserve Bank of India Duvvuri Subbarao said: "Growth recovery is going to be more modest and protracted than most people anticipate."

He pointed out that the main reason behind India's slowdown in recent years (from an average of 9.5 per cent in 2005-2008 to less than 5 per cent currently) was not the global financial crisis, but a sharp decline in investment.

"There is the anticipation that once elections are over, a stable government will take office, investment will be kick-started, the economy will get into a virtuous cycle and growth will again accelerate to 8 per cent or more. Growth will accelerate, but it will be a slow process, if only because investment has stalled in the last four years. For new investment to come in and produce enough productive capacity will take a gestation period of three-four years."

Mr Subbarao is in Singapore at the invitation of the Monetary Authority of Singapore and the NUS Business School where he is a Distinguished Fellow. He also struck a cautious note when he spoke on India's elections at a conference last week organised by the Institute of South Asian Studies (ISAS). He pointed out that most of the projects that have been stalled in India can only be revived by state governments - not by the central government in New Delhi, because they are stalled for reasons such as difficulties in land acquisition, which is a state-related issue.

He noted that there is also a problem with corporate leverage, as well as high non-performing assets in the Indian banking system, which will impair both borrowing and lending capacity. The scope for monetary easing is also limited with India's inflation rate running at close to 10 per cent. Thus, a too-rapid revival of investment could create a spurt of demand which could quickly add to inflation. "Restoring growth will be a marathon, not a sprint," he added.

JP Morgan's India economist Sajjid Chinoy also urges against high expectations from a new government. Citing a study by the Centre for Monitoring the Indian Economy, he noted, in an article in India's Business Standard newspaper, that more than half of the top 50 stalled projects in value terms are stuck because of land-acquisition problems.

"All told, 75 to 80 per cent of the problems on the ground are outside the direct jurisdiction of the central government," he added. A temporary rally is possible and some shovel-ready projects could be implemented which could produce a growth pop for a quarter or two. "But a more sustained recovery will be far more challenging and time-consuming given the facts on the ground."

S Narayan, economic adviser to the former BJP leader and Prime Minister Atal Bihari Vaypayee, thinks there is some scope for positive action. In a recent paper published by The Hindu Centre for Politics and Public Policy, he noted that some projects in the power and road sectors are stalled because of pricing issues and getting these off the ground need not be a protracted process. "Given the regulatory frameworks in existence, this is just a task of expediting decisions rather than re-inventing the wheel."

Mr Narayan, who is Head of Research and Senior Visiting Fellow at ISAS, suggested that there is also scope to fast-track some initiatives in the areas of agriculture, including logistics such as cold-storage chains, as well as manufacturing, where "a massive programme of incentives" in the form of investment allowances, capital subsidies and tariff concessions could be implemented quickly.

BJP politician Arun Jaitley, who is seen as the front-runner for the post of Finance Minister in a Modi-led government, also appears to hold out some hope for the short term. While on the campaign trail last month, he told the news agency Reuters, when asked how India's economic climate could be changed: "You will have to, both in terms of policies and procedures, give an impression that it's now easy to do business in India. You make five big clearances, some big-ticket clearances ... I think a political change itself will restore confidence in the first instance."