REUTERS/ Danish Siddiqui
India's deep economic challenges — from declining consumer confidence to fizzling industrial output to a weakening rupee — have caused the country's seen economic growth rate slow to its lowest pace in a decade.
In a recent note to clients, Morgan Stanley analyst Chetan Ahya argues that policy-makers need to introduce three major top-down changes to improve sentiment and productivity.
- The right mix of fiscal and monetary policy. "On fiscal policy, the government needs to commit on sustainable policies," Ahya writes. "Unlike in 2003-2007 period, in the last five years, the government’s extreme focus on redistribution without commensurate growth in income pie has led to the challenges of unsustainable fiscal management. Over the last five years, in a bid to make growth inclusive, there has been a lack of focus to achieve sustainable growth."
- Policy makers need to "reverse the distortion to prices of land, labor and capital that had occurred over the past five years." Ahya notes: "The government will also need to rework other policies which have indirectly yielded these side effects. The most important amongst these is to address the vicious loop of high food prices and pace of rural wages growth. While the government has recently taken some steps in this direction, so far there has been little effort to address the persistent rise in food prices and strong growth in rural wages."
- "Policy makers will also need to comprehensively improve the business climate," Ahya writes. "The business environment in India has become less competitive and India has become less attractive as an investment destination. To correct this, we believe that the policy makers will need to sustain the policy reform momentum to revive the sentiment for overall investments and growth as this will also help boost FDI investments."
Ahya warns that a "sooner than anticipated withdrawal of quantitative easing" in the US could lead to a rise in the US dollar and rates, which would mean "severe negative consequences for India."
It seems India's problems will linger for at least a little while.
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