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Our Bureau

Rising global interest rates, low infrastructure spending cited as reasons

Mumbai , June 1

India's economy is heading for a deceleration on account of the rising global interest rates, slow pace of infrastructure spending and lack of political will to take bold decisions, said Mr Chetan Ahya, senior economist and Executive Director of JM Morgan Stanley.

For the current fiscal ending March 31, 2007, the economic growth will be just 6.6 per cent, much below the Government target of about 9-10 per cent, he said, sharing the contents of Morgan Stanley's `India and China: New Tigers of Asia, Part-II', a special economic analysis of the two Asian countries.

The report is an update on its earlier report on India and China published in June 2004.

"A 3-4 quarters of deceleration is possible in India. Global rate cycle has reversed and this will have a cascading effect on the system," Mr Ahya told Business Line. "Economic growth could dip below 7 per cent in India, before the long term path of strong economic growth are resumed," the report said.

Highlighting some of the key challenges that India faces in the short term, the report pointed out the slow pace of infrastructure spending, weak public finances, difficulty in augmenting reserves (through privatisation and FDI) and lack of effort in pushing labour law reforms.

Macro constraint

"We believe that the single most macro constraint on the Indian economy, limiting its average growth rate, is the low spending on infrastructure. We estimate India is currently spending a miniscule amount compared to its needs," the report notes, adding that the country needed a national plan to increase infrastructure spending to 7-8 per cent of GDP, from an estimated 3.6 per cent of GDP in 2005, to push the economy onto a sustained growth path of 8-9 per cent a year," it said.

Mr Ahya also felt that only a crisis-like situation would force the Government to push through with reforms on key fronts including divestment, FDI and infrastructure spending.

Unless India "pre-empt and act quickly", he said, the economic growth may dip below seven per cent in the next 18-24 month period. China, on the other hand, is more proactive in terms of policy interventions, he pointed out.

Growth story

Over the long-term, however, the India growth story continues, the Morgan Stanley economist said.

Considering the increased weight of Left parties, Mr Ahya said the Government was unlikely to go farther in terms of labour reforms and privatisation. "Politicians who oppose privatisation claim that the policy hurts the welfare of the labour force.

In our view, this argument misses the big picture and focuses on a very narrow section of the population," the report said, pointing out that PSU workforce constituted just 1.6 per cent of the total work force.

Fiscal deficit

Another area of concern for India is the fiscal deficit, which is the highest among those in major emerging markets and about two to three times those of major developed economies as a percentage to GDP basis.

The combined fiscal deficit (central plus state governments' deficit) is estimated at 7.8 per cent of GDP for 2006 fiscal, including off-budget items like oil subsidies and State electricity board losses totalling about 1.9 per cent of GDP, the report said.

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