Need to boost investor confidence for sustainable, transformative growth

India’s official statisticians reported 13.5 per cent growth in the April to June quarter of this year. This meant that the country whooshed into top place as the world’s fastest-growing large economy — and, incidentally, replaced Great Britain as the world’s fifth-biggest economy.

Unfortunately, that’s where the good news about India’s growth prospects ends. Those GDP numbers were actually a disappointment, given that the same quarter last year saw India shut down amid its devastating Delta-driven Covid wave; a Bloomberg survey of economists expected growth in excess of 15 per cent.

Over the past three years, in fact, GDP in India has grown just over 3 per cent — and less than 4 per cent since the last quarter before the pandemic. This financial year — which will end in March 2023 — is unlikely to break any records: Most now expect that real growth will not reach 7 per cent even off a low base.

If you look for reasons to be optimistic, you can find them. For example, capacity utilization in Indian manufacturing recently hit 75 per cent, the highest it has been for almost a decade. Some economists hope that this means that the problem plaguing the Indian macro-economy for the past decade — anemic private sector investment — will stop being a constraint on growth. Yet investment figures as a percentage of inflation-adjusted GDP continue to be under par, 2.5 percentage points below what they were prior to the pandemic.

Some Indian officials think that the return of high investment and growth is only a matter of time, and that positive policy changes over the past few years — from the reform of indirect taxes to new industrial policies that focus on domestic manufacturing — will bear fruit in the medium term. But we’ve heard that line before, multiple times.

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If it hopes to return to a high-growth trajectory, India simply can’t afford to give in to complacency. Something crucial is still missing in the country’s policy mix: a proper understanding of what investors really need.

In a world of rising interest rates and risk-off sentiment, there still aren’t enough investible projects available in India with the right risk-return profile. A lot of capital continues to flow into India but mainly from risk-tolerant sources such private equity, or toward companies believed capable of managing political risk such as Adani Enterprises Ltd.

The companies that support job increases and broader economic growth — smaller enterprises or those in the infrastructure sector, for example — don’t get as much of a look. Even global portfolio investors have noted that, over the past 10 years, Indian equities haven’t delivered better returns than the much more transparent US market.

Broadening the Indian private sector’s access to capital by reducing environmental risk should be the government’s No. 1 priority going forward. That requires the implementation of reforms that are well understood and have been advocated for years, but have been shifted to the back burner in comparison to more high-profile subsidies and interventionist policies.

Administrative and judicial reforms, for example, are overdue. Dispute resolution in India remains a nightmare. According to the World Bank’s 2020 Ease of Doing Business report, India ranked 163rd in the world on contract enforcement. It took an average of 1,445 days to resolve commercial disputes through the court system.

The World Bank has since stopped publishing its independent evaluations of the business climate, and the Indian government maintains that these numbers have improved since then. But investors in India still have a justifiable fear of going to court. Even the government’s landmark bankruptcy process has slowed to a crawl, with the National Company Law Tribunal saying last month that it would hear only “urgent” cases because 30 of its 63 judicial slots remain unfilled.

One way to make up for the lack of judicial and administrative reforms would be to allow greater space for arbitration, including international arbitration. But India shifted in the opposite direction over the past decade, unilaterally exiting bilateral investment treaties and moving to reinforce the primacy of domestic courts. Those policies were short-sighted and should be reversed.

The global mood has changed. India needs to show investors not only that they can achieve decent returns in the country but that their money is safe here. That requires an entirely different set of reforms than the government has so far been comfortable with. Unless policy makers get cracking on changing the overall risk profile for investment in India, there’s little chance that they will get private investment up to the levels necessary for sustained and transformative high growth.