India’s new market reforms and privatization drive have started a debate about whether Asia’s third-largest economy is poised for a rebound.
Amid fears that a stalled reform agenda had tarnished its investment allure, the government announced a programme aimed at liberalizing the rules for foreign direct investment (FDI) in the country.
The new regulations permit foreign investors to purchase a maximum 49% stake in domestic airline carriers and 51% in retail industry. Further measures include a cut in diesel fuel subsidies and the selling of government stakes in state-owned enterprises (SOEs).
The reforms are in part an attempt to tackle the rising current-account deficit, which reached 4.1% of GDP in 2011/12. In addition, a declining rupee, rising inflation – expected to average 7.0% to 7.5% in 2012/13, according to ICRA – and a moderation in economic growth are all factors leaving India’s credit rating in a vulnerable position.
Given these developments, India is courting foreign capital to boost the rupee and plug the current-account gap.
A recent report by Asiamoney has argued: “India has a poor track record of following through on reforms and policy changes. Such was the case in November when parliamentary interference caused delays on FDI announcements on multi-brand retail reforms. Standard & Poor’s, which rates India BBB- said in June that inefficient policy implementation could result in a junk rating.”
In many ways, therefore, the decision by S&P and Fitch to downgrade India’s credit rating to negative in June was a pre-cursor to the market reforms recently initiated.
This time around, the government and wider business community are beginning to realize that the successful implementation of these market reforms will form a central component in reviving India’s economic competitiveness and bringing about much needed investment.
However, will India’s economic reforms be enough to safeguard its fiscal credit worthiness? Euromoney pieces together the views across different institutions:
“India has been consistent with the reform implementation. [It has] taken a very measured approach to reforms recently, which is going to detract some of the risks and concerns people have about India’s overall economy.
Institute of International Finance – reforms have been positively received by financial markets and lifted business confidence.
“Initiatives to contain subsidies, attract foreign investment and alleviate structural impediments were positively received by financial markets. It has also lifted business sentiment. The stock market rose 7% between the end of August and late September. The rupee rebounded to Rs53/$1 from Rs55.5/$1 at the end of August and a record low of Rs57.3/$1 in late June.
Deutsche Bank: Market reforms – a step in the right direction into tackling the country’s fiscal deficit.
Euromoney Country Risk – India’s overall ECR rebounds from Q2.
“The reforms are necessary but will be difficult to implement in full. India has been going through a rough patch, with growth slowing more sharply than expected. Real GDP growth for FY12/13 is now likely to come in at 6% year-on-year at best, down from 6.9% in FY11/12 and a sharp drop from 9.6% in FY10/11. This has posed many challenges to keeping a budget target of a fiscal deficit at 5.1% of GDP. The immediate challenges are risks of roll-back and then execution risks.
“A rapid political backlash occurred when the Trinamool Congress (TMC), the ruling coalition’s second-largest party, announced it was withdrawing from the government. While the coalition is not facing an immediate threat of collapse, it is now more vulnerable. If other parties follow TMC’s move, the Congress Party will be forced to consider partial roll-backs. In addition, the past record of government divestment of SOEs suggests there are execution risks and that revenue may disappoint.
“All in all, the push for reform is commendable and should go some way to helping fiscal consolidation. While the defined fiscal target of 5.1% may not necessarily be achieved, the overshoot should not be as large as in FY 11/12.”
This article originally appeared on Euromoney Country Risk.