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Lax reforms hindering India's growth

Union Finance Minister Yashwant Sinha was not probably totally wrong when he claimed that the US attack will not greatly impact the Indian economy.

Given India's infinitesimal share in world trade (0.5 per cent) and its low share of trade as a percentage of GDP, the Indian economy is more or less insulated.

At a debate -- State of the Economy -- organised by the Confederation of the Indian Industry in New Delhi, the panelists agreed that the global slowdown should not be any excuse for the poor performance of the Indian economy.

They said it would, in fact, be the implementation of internal reforms that would decide the direction of the Indian economy.

In the backdrop of the recent developments in the US, the debate was basically centered around its impact on the world's largest economy and on India. A clear difference of opinion emerged during the debate about the prospects of a US recovery.

Surjit Bhalla, MD, Oxus Investment Pvt Ltd argued that the measures undertaken in the US, such as an expansionary monetary policy, the existence of a fiscal surplus and reported trends of rising consumer confidence would lead to a rapid recovery in the US economy. In fact, the probability of the US exhibiting a V-shaped recovery with higher growth rates was just around the corner.

On the other hand, Omkar Goswami, chief economist, CII felt that the US economy was far from a quick revival. Given the fact that the US - the largest producer and consumer in the world, Japan - the largest economy in Asia and the European Union were experiencing economic turmoil, the world was heading for a recession.

According to him, the US, at the least, was looking at one quarter of severe compression and two quarters of recession.

While agreeing that India would be more or less insulated, he pointed out that sectors such as information technology, telecom and travel and tourism will not escape the global slowdown.

In fact, the days of 3-digit growth in the IT sector were a thing of the past. Growth in the future would depend on companies moving up the value chain, he added.

Shankar Acharya, ICRIER (Indian Council for Research on International Economic Relations), addressing the panelists explained that the slowdown in the economy was not a recent phenomenon and was a result of factors that had started brewing 4 or 5 years ago.

He stated that slowdown in the agricultural and industrial sectors had begun as early as 1997 and the present dilemma was in fact a consequence of the absence of timely reforms.

He also pointed out that the drop in investments was very much at the heart of the problem.

Commenting on the fiscal situation, he said that India's deficit at over 10 per cent was the third largest in the world and according to him this was an area that needed to be addressed urgently.

Suggesting measures to revive the economy Acharya said that it was most imperative to implement pending reforms.

Suman Beri, director general NCAER (National Council of Applied Economic Research) said that over the medium term, the Indian economy had posted an impressive performance and the stability of growth rates achieved by the Indian economy has actually provided overall degree of resilience to the economy.

He, however, said that the Indian trade policy needed to be more rigid since high turbulence in policies would hamper the economy's growth prospects.

Speaking on the fiscal situation he said that India has learned from the experience of 1991 that a crisis could be avoided as long as the growth rates were sustained.

He stressed that the post September 11 crisis situation should be transformed into an opportunity to push reforms internally.

He also said that with the opening up of the world economy and the present political scenario, high inflation rates was the thing of the past and therefore during the present economic crisis policy makers should not worry about the inflation and the increasing oil prices.

Isher Ahluwalia, director and CEO, ICRIER debated that it was a well known fact that the Indian economy had a potential to grow at 8-9 per cent, however it was the lack of reforms that had impeded the realisation of this potential.

She was of the opinion that India would be better off adhering to a set of multilateral trading rules rather than negotiate bilaterally. It was, therefore, imperative for India to be an active member of the WTO (World Trade Organisation).

On internal reforms, Ahluwalia said that privatisation of PSUs was a critical element in solving the fiscal problem.

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