Doubts over India's growth rate; praise for Rajan: Here's what US report said

The US State Department's Investment Climate Statements for 2016 report has a few praises for the Narendra Modi government and also some scathing reminders.

On the one hand, the report doubted the veracity of the 7.6 percent GDP growth recorded by the country and criticised the pace of reforms, while on the other it praised the prime minister for prioritising economic growth to fulfill its electoral promises.

Here's a low down on what the US report says:

Prime Minister Narendra Modi with RBI Governor Raghuram Rajan. PTI

Prime Minister Narendra Modi with RBI Governor Raghuram Rajan. PTI

1) The report lists out the Modi government's initiatives aimed at improving sentiment for doing business in India: a) Streamlining bureaucratic decision making; b) raising FDI limits in certain sectors—including defense and railway infrastructure; c) Make in India, a "branded campaign to attract international capital to the country’s struggling manufacturing sector"; d) setting a target to raise India's position in the World Bank’s Ease of Doing Business rankings; e) Allowing 100 percent foreign investment in civil aviation, defense, certain sectors of e-commerce, and pharma; and f) easing sourcing requirements for some retailers.

2) The US doubts India's growth rate. "Ostensibly, India is one of the fastest growing countries in the world, but this depressed investor sentiment suggests the approximately 7.5 percent growth rate may be overstated," the report said. This is something many experts have already pointed out. The latest to say this was Morgan Stanley's Chief Global Strategist Ruchir Sharma. "I think India's GDP data is overstated," he had told PTI. "The private sector investment is still not picking up in India," he had noted, linking low sustainable inflation to 'very high' level of investment.

3) The US report is critical of the slow pace of reforms that is not matching its rhetoric. Many of the reforms it did propose have struggled to pass through Parliament, the report says providing example of the land acquisition bill, which failed to pass in Parliament, and GST Bill, which is still being negotiated with the opposition parties.

4) The report also has a word of praise for outgoing RBI governor Raghuram Rajan for steering the economy through a difficult period. "...The monetary stewardship of Raghuram Rajan, the respected Governor General of the Reserve Bank of India, further boosted investor sentiment," the report says. This should serve as a scathing reminder for all Rajan critics and Modi himself for his much-delayed defence of the RBI chief.

5) The report lauds the government for bringing in regulatory clarity after the big scams that tarnished the country's image in 2010 and 2011. "There is now more clarity on the regulatory front. The government is auctioning spectrum licenses and has clearly stated its intent to eliminate retrospective taxation proposals. India also has transfer pricing rules that apply to related party transactions," the report says. The introduction of GST will be an added advantage for the businesses, the report says.

6) When it comes to ease of doing business, the biggest thorn in the flesh is enforcement of contracts. In this category, the report reckons that the country ranks 178 out of 189 in the World Bank’s Ease of Doing Business Report. Citing the World Bank report extensively, it says enforcement of contracts takes an average of 1,420 days in India. "This includes an average of 20 days for filing the dispute, 1,095 days for trial, and 305 days for enforcement of judgments. As a percentage of the total claim, dispute resolution will cost the litigant an average of 39.6 percent," it says.

7) Despite all these challenges, India offers immense opportunities for foreign companies, says the report. "India’s infrastructure needs are estimated at $1.5-$2 trillion over the next 5-7 years, offering excellent opportunities for US companies... provided appropriate mechanisms for financing are developed," the report says, citing PM Modi's 100 Smart Cities project. However, it also advised that "success (in India) requires a long-term planning horizon and a state-by-state strategy to adapt to the complexity and diversity of India’s markets".

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Updated Date: Jul 07, 2016 10:16:09 IST

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