Is India still worth investing into? Part II - Views on News from Equitymaster

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Is India still worth investing into? Part II

Oct 1, 2008

In the previous article, we had given an insight to the positive aspects of the Indian economy. In this article we throw some light on the factors that may hinder India's growth prospects.Lower spend on Infrastructure: The single most important constraint on the Indian economy, is the low spending on infrastructure. India spends just about 4% of its GDP on infrastructure building as compared to 9% in China. Growth in productive capacity has been relatively slower than growth in demand. While seaports and airports are running at maximum capacity, the peak electricity demand deficit of 13% has forced supply outages in several metropolitan areas as well. Lack of political will to work towards infrastructure spending, lack of equipments, weak regulatory framework, land acquisition problems, high fiscal deficit, poor participation of the private sector are some of the reasons causing the hindrances.

Mounting fiscal deficit: The combined fiscal deficit of the Central and State Government is very high. The total fiscal deficit of India was estimated at around 5.6% in FY08 (source: RBI's Handbook of Statistics). Although this has halved from 10% in FY03, the figure is relatively very high as compared to other developing nations. Subsidies, wasteful expenditure, delay in implementation of sector reforms and privatization the loss making public sector undertakings as resulted in high deficit. The farm loan waiver, rising crude oil prices, appreciating dollar, higher wages for government employees and election expenses have already brought the fiscal deficit to 88% of the budgeted number for FY09.

Low per capita income: 420 m Indians survive on just US$ 2 a day. While India is the second fastest growing economy in the world after China, in terms of per capita income levels, it still ranks it below all Asian economies except Pakistan and Bangladesh. Though the structural transformation in the economy augurs well for raising the per-capita income levels we have a long way to go to achieve a reasonable standard of living.

India has achieved an over 27% decline in poverty and is well on track to meet the target set for 2015 (19% reduction). However, the number of people below the US$ 1.25 a day poverty line increased to 455 m in 2005 from 420 m people in 1981. Still 28% of its population lives below the poverty line. While India is rapidly growing, the fruits of growth have not percolated to the poorer segments of the society and the rural areas. Even in the social infrastructure and education system, wide inequality and low availability exists.

Economic divide: If you thought most Indians are working in BPOs or cracking software codes you were wrong. Even now 60% of the Indian labour force is employed in agriculture, which contributes less than 1% to overall GDP growth. Low investment in irrigation, obsolete technology, inadequate crop diversification and insufficient inputs has resulted in a decline in agriculture growth from 3% in the 1980's to 2% in the last decade. The share of the agriculture to GDP has fallen below 20%. This has resulted in lower per capita income for the rural areas, increasing the inequality.

Business unfriendliness: Among South Asian countries, India is ranked the lowest as far as procedure to start a business is concerned. India is ranked 122nd out of 181 countries as per 'Doing Business Report 2009' prepared jointly by the International Finance Corporation and the World Bank.

India ranks 85th amongst the most corrupt country in the world out of a total list of 180. The PHD Chamber of Commerce and Industry reckons that Indian industry loses at least Rs 630 bn of investment because of the corrupt business environment. The black economy in India is gaining prominence by the day. Over the years, black economy has had substantial impact on the size of the Indian economy. The high rates of inflation and taxation in India have been a result of the increasing powers and activities of the black economy.

While all the above problems are very serious, the biggest hurdle is the political environment. The pace of reforms in the economic environment is very slow. Although the government has been initiating reforms, the pace of implementation is not robust enough to sustain the fast growth. The case of Tata Motors having to wind up operations in West Bengal was a setback to the industrialisation process. As has been quipped by Mr. Narayana Murthy, "This will not only unleash fears and uncertainty in the mind of Indian and foreign investors, but will be a stumbling block for India's strong growth."

In the next article of this series we shall focus on some of the broader themes that will drive the growth of Indian economy.

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