Why baby steps in India reforms are the prudent things to do
And there's been progress on most fronts.
The government of India completed three months in office last month and a spot-check on the developments so far show that the plan of action has been heavy on small, incremental changes in existing initiatives rather than broad-sweeping fresh reforms.
According to a research note from DBS, however, while some quarters have expressed disappointment on the pace of progress, it believes that baby steps are prudent in light of the entrenched structural problems.
Progress has been made on most fronts. To name a few, centralization of the decision-making process and streamlining inter-ministerial interaction has ensured quicker execution and accountability. Bunch of measures have been taken to contain volatility in perishable food items, mainly fruits and vegetables.
Here's more from DBS:
Negotiations with the state governments on unifying project approval platforms and introducing the Goods and Services Tax (GST) are ongoing. Funding requirements for infrastructure projects are being met by external funds (eg. Japan assured funds to the tune of USD 35bn) and easing bank restrictions.
Towards improving the ease of doing business, part of the application process has been made web-based and time bound, where applicable.
There has also been a push to ensure that the approvals trickle all the way to the grass-root/state level and projects are set into motion.
Clarity is also sought on the retrospective tax amendments, which might be made a part of the February 2015 budget. Supply-side bottlenecks to lower inflation are yet to be dealt with, with firm food inflation looking increasingly entrenched on the economy's changing demographics. Land acquisition and relook at labour laws are the other important area(s) that warrant attention.
Nonetheless, we think it is too early to pass any judgments. As far as progress is being made, even if incremental, the economy is moving in the right direction.
We are positive on this year's growth prospects and expect GDP to average 6.0-6.5% over these two years on higher contribution by investment spending in the initial phase and consumption rebound later in the year.
Inflation risks might resurface amid firm aggregate demand and supply-strapped conditions, leaving the Reserve Bank of India (RBI) in a cautious mood.
However, gradual improvement in supply-side constraints and capacity expansion should ease the growth-inflation trade-off in the long run.