All Sorts of Things

Random posts on all sorts of things designed to inform and provoke.

India: Increasing Investment in Government Debt Unlikely to Pay Dividends without Structural Changes

india_car_copyGlobal financial markets reacted positively to New Delhi’s announcement that it was raising the limit of foreign investment in government debt. As part of its efforts to spur capital inflows and avert a debt-rating downgrade, the government recently increased the limit of non-Indian investment in government bonds and corporate notes by $5 billion each.

Investors and analysts have long been disappointed with economic growth levels in Asia’s third-largest economy and New Delhi’s hope is that these steps will complement the other measures that have been undertaken to re-start this growth.  Some of these measures include limiting government spending, reducing fuel subsidies and allowing more investment in multiple industries.

The Indian government projects the country’s economic growth will be the slowest in the past decade and, combined with the fast approaching elections, must be giving heart palpitations to the Congress Party’s leadership. However, Credit Suisse is projecting 2013-14 growth at 6.9 percent while the International Monetary Fund is forecasting a 5.9 percent growth rate; both institutions also anticipate higher growth in the 2014-15 timeframe. Clearly, the global community is anticipating either a flurry of activity from the Indian government, a new administration in New Delhi or faster global economic growth.

Regardless, these are some optimistic projections and have some basis in reality. For example, global funds raised their holdings of Indian bonds by 20 percent in 2012, and, given these recent activities, will likely accelerate these investments.  Indian companies, however, continue to face problems in generating funds from the overseas market but this will likely change as investments roll into the retail, insurance and pension sectors.

I continue to believe that the Indian economy will not recover until the government makes major institutional changes such as cutting spending, hitting its self-appointed fiscal targets and streamlining its bureaucracy. In their absence, the measures to attract investment will only provide a short-term balm that will not cure the country’s economic pain.

The Congress Party, however, may be hoping for some short-term growth only as that momentum may take it through the elections next year. The first true indication of this assessment will come next month when the Indian budget is formally released. Until that time, all these actions are just words and not part of a conversation.

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This entry was posted on January 24, 2013 by in Global Economy and tagged , , , , .
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