India cannot afford to shun economic reform: Analysts
Reuters, Bombay
Despite communist influence on the new government, the future of India's economic reforms looks safe in the hands of a progressive cabinet, which will rely on the need for growth to push through investor-friendly measures.Analysts say Asia's third-largest economy will need more of the sort of radical reforms that pulled it from the brink of bankruptcy 14 years ago if it wants to remain one of the world's fastest-growing economies. The new communist-backed government sent shockwaves through financial markets within days of taking charge in May by scrapping plans to sell profitable state firms. The market's nervousness grew more intense following a cut in the foreign investment ceiling for airports and a promise to increase credit to the default-prone farm sector. Despite this bumpy start, analysts say reforms will continue because of the composition of the cabinet and its focus on economic growth and development. "It is a dream team as far as talent is concerned, but it has been given a very bad field to play on," said Saumitra Chaudhuri, economic adviser at domestic credit rating agency ICRA Ltd, referring to the diverse opinions of the parliament allies. Others analysts noted that political compulsion alone would not keep reforms on track anyway. The need to further strengthen the economy, especially in poor rural India, which contributes only 25 percent to the GDP, simply necessitated policies that would lead to more investments and jobs. The federal budget will be presented in parliament on July 8, when the government is expected to raise the flag for reforms. A planned value-added tax, for one, would boost government revenue, allowing it to pour money into the social infrastructure of health and education and also attempt to balance the books. India has one of the world's highest ratios of fiscal deficit to GDP. It was 9.5 percent in the latest fiscal year. The government has set a goal of annual economic growth of seven to eight percent, and wants to boost health and education spending to as much as nine percent of gross domestic product (GDP) from less than one percent. Analysts say such objectives will be hard to achieve if the burden is borne entirely by the public sector and that innovative public-private sector partnerships will help solve the problem.
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