India badly needs FDI to boost economic growth

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Published: April 13, 2019 2:02:01 AM

Neither the govt nor private sector has capacity to spend.

The biggest challenge probably will be to rejuvenate the farm sector and boost rural incomes.

After RBI lowered its growth forecast for 2019-20, the IMF, too, revised its projections for the Indian economy downwards. The headwinds to growth are well-documented: a slowing world economy pegged to grow at just 3.3% in 2019, a relatively weak banking system and insufficient liquidity to aid affordable credit growth or spur consumer demand. Amongst the biggest roadblocks for the economy is that investments will continue to remain slow with the government unable to spend beyond a point due to fiscal constraints and the private sector lacking the financial wherewithal to create fresh capacity. The many welfare schemes promised by political parties in their election manifestoes will mean additional pressure on government finances, already in a somewhat fragile state thanks to the large extra-budgetary borrowings. The biggest challenge probably will be to rejuvenate the farm sector and boost rural incomes.

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Perhaps the best way to start out would be to focus on attracting foreign capital into the infrastructure sector. Patient capital will come in but the government must frame easier rules and regulations and must commit to leaving these untouched. Unless there is certainty on the regulatory front—and India’s track record is patchy—no foreign investor will commit capital. Also, the government must get over its reluctance to free up FDI norms in sectors such as multi-brand retail and defence. India remains an attractive investment destination, and if the norms are freed up, the country could gain enormously. Even as it works towards mobilising fresh investments, however, the government must work at freeing up the investments locked up in existing projects that are stalled for one reason or another; for instance, some Rs 3.5 lakh crore is stuck in housing projects alone. One big reason industry is hesitant to add to capacity is that labour laws remain restrictive. Although the government initiated some reform, it held back which is why the Make in India programme was a complete non-starter. Also, tax terrorism must stop else multinationals will stay away; it is better the economy grows and yields revenues rather than the government coercing companies. As for reviving agriculture, the only way to do it is to initiate reforms—better linkages, more mandis, and by boosting electronic trade. Although prices of several products are already at or above global levels, a liberal export policy must be framed so that farmers can take advantage of it at any time.

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If the government is to support investments, it must stop subsidising inefficient enterprises—a tough decision given the large numbers employed in these state-owned firms and banks. But throwing good money after bad can only hurt the exchequer and the government’s ability to boost growth and create jobs. And there is no room to further re-base the data to show higher growth.

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