By Advai Pathak
India’s current account deficit grew to a record high of 6.67% of GDP in the last quarter of 2012. Gold and oil imports have surged while Indian exports have remained relatively stable. Although the general expectation was for a rise in the deficit, these figures are significantly larger than originally projected.
The data highlights India’s need to attract foreign direct investment, an issue that has dominated national politics over the past year. The government’s decision to open the domestic retail market to foreign brands was initially greeted with plaudits from liberal economists and business leaders globally. However, several aspects of the reform bill maintain prohibitive standards that make India an unattractive business climate for foreign investors.
Contentious tax policies have led to protracted disputes with several international corporations including high-profile cases against the likes of Shell, Vodafone, and Nokia. India also continues to suffer from its poor infrastructure and the disparities between its individual states. Investing in national projects is nearly impossible if even neighboring states have different levels of development. Legislation in the last year’s reform bill that forces foreign retail brands to spend half their initial investment on domestic infrastructure projects has not been well received.
Corruption and bribery, always a fixture in Indian business and politics, continue to be exposed at all levels. Additionally, the hardline views of the opposition BJP add further reason for foreigners to be wary of investing too soon in India. The party has threatened to rescind several of the liberal, reform-minded bills legislated under the current government. With elections in 2014, the livelihood of India’s ‘second great liberalization’ is under threat.
India seems to be losing out to other emerging markets as investors baulk at its bureaucratic inefficiency and slowing growth. Attracting greater capital from abroad and boosting national exports will not be easy. However, Manmohan Singh’ government has shown a willingness to reform in individual industries and several investors, including Britain, remain keen believers in Indian growth. The vision remains feasible, even if the obstacles are formidable.
Sources:Financial TimesEconomist