India’s FDI Reforms Boost Investor Confidence But Their Implementation Likely To Be Slow

The decision by the Indian government to liberalize foreign investment has helped give the much needed boost to market confidence.

The new regulations allow foreign investors to buy up to 49 percent of domestic airlines and, more controversially, to invest up to 51 percent in retail industry. This announcement came when investors were getting worried that there was no commitment from the Congress party towards market-oriented reforms and also its allies were actively opposing even incremental measures.

Market participants were getting concerned that during the coming years, this policy paralysis was likely to get worse. The decision to allow FDI has dispelled the concern to an extent.

However, experts feel that implementation of these reforms will be slow and further measures are needed. There are still political obstacles to their implementation at the central government level. The Trinamool Congress has already pulled out of the ruling coalition in protest against the reforms. There is the uncertainty that this stand-off could lead to early elections.

The new regulations governing the FDI in retail will have to be adopted by the state governments. But several state governments have said that they will not do so.

Importantly, the economy is continuing to struggle. The economy deteriorated sharply to 5.3 percent in the January-March quarter, down from 9.2 percent in the same period last year. The slowdown in the economy is to a great extent attributed to the weak governance. Market players are worried to note that the current government's second term, which began in 2009, has so far seen no significant economic reforms.

“A lasting pickup in growth requires a broader set of reforms. These include an acceleration of infrastructure investment, faster decision making on land acquisition, labor market reform and modern bankruptcy regulations. Last week’s decisions give some grounds for optimism, but we doubt that the government has the ability to push through many more measures prior to the 2014 general election,” Andrew Kenningham, an economist at Capital Economics, said.

Meanwhile, the Reserve Bank of India this week decided to reduce the cash reserve ratio from 4.75 percent to 4.50 percent, which gave the signal that it is willing to support the government’s efforts to reaccelerate growth. The RBI is also expected to cut the rates in the next meeting in October in spite of the fact that inflation rose to 7.6 percent in August from 6.9 percent in July.