India faces slow growth, investors lose confidence
2012-08-28 17:05:00
India's new team in the finance ministry has a daunting task ahead of them.
The country is facing slow growth as investors lose confidence and pull money out.
For the first three months ended June, foreign investment which includes FDI and portfolio flows dropped about 80 per cent year-on-year to US$2 billion.
Asia's third largest economy behind China and Japan is expected to grow below 7 per cent for 2012, its slowest pace in almost a decade.
Although weak demand from Europe and the US clearly had an impact, many of India's issues are domestic ones.
Market economist at Mizuho Corporate Bank, Vishnu Varathan, said: "Investor confidence needs to be revived. I think that's one key issue because investments dropping off is one key reason why growth has slowed down tremendously. Another issue that India grapples with is high oil prices and high inflation. India imports a lot of oil and subsidises a lot of oil as well, so both from a budget perspective and a trade and current account perspective - these are negatives for India."
Finance Minister Palaniappan Chidambaram has pledged to restart India's growth by attracting more investment both from domestic investors and foreign investors.
He had previously been in the hot seat first from 1996 to 1998 and then from 2004 to 2008 and has a reputation for pushing through tough reforms.
Top on his list is to review retroactive tax measures, which had rattled foreign investors.
The measures were put in place by his predecessor Pranab Mukherjee in February in a crackdown on tax evasion.
He will be joined by new chief economic advisor Raghuram Rajan.
The ex-IMF chief economist is most well known for predicting the subprime crisis two years before it hit the world economy.
Despite the sluggish economic outlook, one bright spot could be the country's homegrown enterprises like Tata and Reliance.
Head of international business, Commercial Banking, at HSBC India, Bill Susinski, said: "The state doesn't have as big a play as some countries like China in terms of the state owned enterprises. I think that's what helps bring out India's entrepreneurial spirit and you've seen them being a leader in areas such as IT, steel, pharmaceuticals - it's really the private sector that will continue to drive the growth in India."
India's worst power outage earlier this year highlighted the urgent need for major reforms to modernise infrastructure.
And investors will be looking to India's newly installed finance dream team to deliver.