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The Biggest Problem for the Economy
Mon, 23 Nov Pre-Open

The Indian economy is clearly not out of the woods. Over the last 18 months, the Modi government has initiated quite a few reforms. The intention continues to remain positive. Sadly, the speed of the reforms process has left a lot to be desired.

On the positive side, the fall in commodity prices has helped India a lot. Inflation is lower than what it used to be. Interest rates are falling. FDI flows have improved. The international narrative about India is still positive. Unfortunately, this will help beyond a point.

India' problem stemmed from a lack of trust by entrepreneurs to invest in the economy. This was partly because crony capitalists came under fire during the UPA 2 years. But mostly, it was due to multiple problems facing the economy: policy paralysis, corruption, labour & land issues, etc. Without investments on the ground, growth was bound to stagnate.

The reality today is the same. Investments have yet to pick up. Confidence in the government seems to be lacking among India's business class. This despite the improved business environment under the Modi government vis-a-vis the UPA government. Thus, it came as no surprise to us when the RBI, recently lowered its GDP growth forecast for FY 15-16 to 7.4% from 7.6% earlier.

The RBI Governor Raghuram Rajan recently flagged this issue as the biggest challenge for the economy. As per the governor, India's factories are running at around 30% capacity and weak capital investment is the key factor preventing India from achieving its full growth potential. With both, public and private investments dropping, India economy continues to be hampered.

We couldn't agree more. We believe private investment will only pick up once there is more clarity on major issues like GST, land acquisition, and labour reforms. Until then, hoping for achhe din would be futile in our opinion.

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