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By James Smith | Published Sep 24, 2012

Indian government’s reforms ‘will be slow’

Moves by India’s government to hike diesel prices and liberalise foreign investment go some way to dispelling the impression of policy paralysis, according to Capital Economics.

However, Capital Economics senior global economist Andrew Kenningham cautions that these reforms will be slow and further measures are needed.

“Fears over inflation will limit how far policymakers can go to support the struggling economy, as highlighted by [the recent] decision to keep rates on hold,” he added.

After months of inactivity, politicians opted to liberalise the rules on foreign investment in the aviation and retail sectors.

New regulations allow foreigners to buy up to 49 per cent of domestic airlines and also invest in multi-brand retail operations such as supermarkets.

Meanwhile, the Cabinet also approved sales of stakes in several state-owned companies to help finance the rising budget deficit.

According to Mr Kenningham, this announcement paves the way for major global retailers to enter the Indian market.

“We would not wish to understate the significance of this decision for the country’s long-term prospects: modern supermarkets will have big implications for supply chains, notably in agriculture and food processing,” he said. “However, there are good reasons to be cautious about the short-term impact of these measures, with several political obstacles remaining.”

Mr Kenningham also said a lasting pick-up in India’s growth would require a broader set of reforms.

These include an acceleration of infrastructure investment, faster decision-making on land acquisition, labour market reform and modern bankruptcy regulations.

“These decisions give some grounds for optimism but we doubt the government has the ability to push through many more measures prior to the 2014 general election,” he added.

“In the meantime, the economy is struggling. Recent data shows a slight fall in industrial production in year-on-year terms during the latest three-month period and the Indian economy is still sensitive to global trade, which looks set to be sluggish for some time yet.”

Creating further problems, the Reserve Bank of India (RBI) has little scope to ease monetary policy and left its key repo rate unchanged at 8 per cent at the latest meeting.

This had been almost unanimously expected by analysts, particularly after inflation rose from 6.9 per cent in July to 7.6 in August.

Mr Kenningham said the guidance accompanying the latest RBI statement has a slightly more dovish tone than in recent months, saying monetary policy has an important role to play in supporting the growth revival.

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