Next Six Months Of Reforms Crucial: Experts

The problem of dealing with public sector entities has stymied efforts of foreign investors looking for returns from their investments, both potential and real, according to advisers on the Indian economy.

Current investors are keeping a close watch, and progress in the next six to twelve months is going to determine whether these sponsors are going to pull out their money, Chichu Balchandani of Credit Suisse First Boston said.

As an adviser to private consortiums, however, Balchandani says the slow pace of implementation has not significantly affected investor interest in India. There has been some obvious drop off, but new investors are appearing interested every day, he adds.

 

Another analyst from the International Institute of Finance (IIF), a major Washington-based financial think tank, said foreign investment was quite strong especially in the manufacturing sector, in terms of both approvals and commitments.

The problems are more where you are dealing with a situation where the private sector has to sell to a public purchaser, for example in the roads, power and telecom sectors, he said speaking on condition of anonymity.

Media reports over the last month in The Economist and the Wall Street Journal have focussed on the corruption problems in the telecom sector and the slowness of approvals and counter-guarantees in the power sector.

The IIF analyst emphasized that he disagreed with The Economist's report that the Indian economy was in a short-term recession.

This is not true, he maintained, We think that the economy is going strong; the monetary policy is easing; access to foreign capital is easing, foreign direct investment is increasing, allowing growth to proceed.

Corruption, he said, was an issue where there was a tolerance factor. Balchandani also agreed. At the same time, the IIF analyst emphasized, If there are delays in getting roads etc. growth cannot be sustained.

Analysts say power sector investment in India has recovered somewhat and the slowness may actually have had some advantages. The Enron renegotiation had led to renegotiation of other contracts and cost reductions.

But new investors want stability and transparency in the rules of the game, the IIF official said. The tendering process has now been reconstituted. But they keep changing the rules, which irritates suppliers, he said. But at the same time, the size of the Indian market keeps them interested, he added. At this moment, India is getting more foreign investment than any country in East Asia, other than China, in FDI and equity investments, noted the IIF analyst.

Over the last two years, managers had been carrying out portfolio reallocation in FDI and equity investment and it was actually strengthening, he added. For India it had topped $7 billion this year where it had been $5 billion last year.

Essentially, this is where East Asia was ten years ago, he emphasized, This is what drove their manufacturing boom.

Advisers and analysts note the recent meeting of the India Development Forum in Tokyo drew $7 billion in commitments, $3 billion of which is going to be in soft loans.

Basically, the reforms are stalled, one analyst said. And if they don't get it going soon, they will lose the goodwill.

Investors are worried about the telecom projects which are still in the doldrums, especially the cellular projects. Since India is a big country, investors expect delays, says Balchandani.

But he gives sustained interest another six to twelve months. The window of opportunity is small, but it is there, concedes another analyst.