Reforms Will Revive Growth in Re-energized India, but Patience Is Needed

New Delhi, India, 5 November 2014 – Less than six months since the government of Prime Minister Narendra Modi took office, the momentum for reform in India appears to be building, with prospects rising for growth to rebound, business and academic leaders agreed in a session on the outlook for the Indian economy at the India Economic Summit, which opened today.

“Things are moving,” said Anand Mahindra, Chairman and Managing Director of Mahindra & Mahindra and a Summit Co-Chair. “Things like licences, which were stuck in the pipeline, have been opened up. The job in India is about plumbing – you basically have to clean the pipes, which were clogged.”

Added Ajay S. Shriram, President of the Confederation of Indian Industry (CII) and Chairman and Senior Managing Director of DCM Shriram: “The government is genuinely serious, but it is such a monolith that percolating down change is a big challenge. This government’s policy is continuously to make changes in all areas. It will take time. We are seeing results and the right direction.”

Gita Gopinath, Professor of Economics at Harvard University, agreed. “India is at a turning point right now”, she argued. “The economy is in better shape than in the past few years.” The government has implemented reforms such as improving labour market compliance and deregulating diesel prices, Gopinath noted. “These are fundamental steps that had to be taken and are being taken.”

But there has yet to be a revival in investment, Gopinath observed. “If we see two or three quarters of steady growth, we can then step back and say the reforms are working.” Pressure will build for more major restructuring that will be needed for India to remove possible constraints to growth, she warned. The government will have to move on major issues such as land acquisition, the infrastructure deficit, investment human capital, the lack of regulatory consistency across states and the need to develop the manufacturing sector and improve agricultural productivity.

With low energy prices, the currency stable and core inflation falling, interest rates are likely to come down, Mahindra remarked. This favourable climate is creating more room to introduce “big-bang reforms”. While the prime minister does not have to act precipitously on anything, “it is now time to be a little more courageous and to press our foot on the accelerator,” Mahindra reckoned. The regulatory and bureaucratic pipes need to be cleaned out to benefit entrepreneurs and small businesses, the core drivers of investment.”

Fiscal responsibility is key, William Danvers, Deputy Secretary-General of the Organisation for Economic Co-operation and Development (OECD), told participants. At this early stage in the Modi administration, clear and consistent communications about policies between the government and the electorate are also crucial, he said. “There is a need for patience for policy reforms to take hold. The biggest threat to a government that has a clear mandate is sometimes the unrealistic expectations that come with a big victory.”

Concluded Mahindra: “Right now, the mood is anything but paralysis. The world is attracted to the energy of this new prime minister and the new government.”