What can India do about growth? By Anoop Singh and Laura Papi of the IMF India’s macroeconomic landscape continues to be challenging. Growth has slowed, while the current account deficit has widened, and inflation is still above the Reserve Bank of India’s comfort zone. We are forecasting growth to recover modestly in 2012/13 from 6.5 per cent in 2011-12. Can India still make it happen? And what would it take? What needs to pick up? Investment. Investment, especially corporate investment, is at the core of this weak performance. While global headwinds have of course contributed, investment has slowed more in India than in many other emerging markets.   Higher investment would be good for India’s ailments of slowing growth and continuing inflation. If you are wondering how higher investment can be good for the current account deficit, the current account deficit is also a symptom of India’s supply constraints: exports are suffering from supply bottlenecks, imports are compensating for deficiencies in domestic production, against the backdrop of robust consumption and a high fiscal deficit. How can investment rebound in this global environment? In India, the revival of investment needs to come from supply-side policies and structural reforms that would boost corporate investment. Accelerating project approvals and implementation and speeding up reforms in the energy sector are urgent priorities. Fiscal consolidation and spending re-orientation — from untargeted subsidies towards infrastructure and well-targeted social spending — are vital complements to these measures. They would help the RBI in lowering inflation, which at current levels harms investment, and in reducing the current account deficit. While this may seem a tall task, it is certainly well recognised. You only have to look at the recent RBI’s reviews, the finance minister’s 2012-13 budget speech, and 12th Plan Approach Paper. Concrete and consistent measures towards these ends would help turn investor sentiment and initiate a virtuous circle, providing easier financing and respite while the authorities make progress on medium-term reforms. At the moment, in many countries, markets disagree on the cure — think for example about the debate on fiscal consolidation in advanced economies — which means that country authorities can find themselves in a situation in which market reaction to many policy measures is uncertain. Instead, India is in a situation in which there is much consensus on what needs to be done, and markets are looking for signals of predictability and consistent progress on the policy agenda. Also, there is no shortage of final demand and impaired balance sheets are not a major drag on growth. Hence, with policy action it is certainly possible that investor sentiment could rebound in India and investment could turn the corner even in the current global environment, rebuilding growth and consolidating the poverty gains that India has achieved over the past decade. Of course, in a situation of heightened global risks, the stakes are high. More vulnerable countries are likely to suffer more damage in periods of high global risk aversion, while countries that can bolster their economic performance are likely to gain disproportionately. Indian policy makers could heed the warning from the slowdown and benefit from the experience of other countries that find themselves in a difficult situation now to ensure India never gets to a point where policy choices become dilemmas. Laura Papi is Assistant Director in the Asia and Pacific Department of the International Monetary Fund. Anoop Singh is Director of the IMF’s Asia and Pacific Department. source: http://blogs.ft.com/beyond-brics/2012/06/07/guest-post-what-can-india-do-about-growth/ Share and Care For Latest Updates Always visit http://satish24k.blogspot.in For Beautiful Wallpapers Always visit http://24ksatish.blogspot.in |
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