After the fireworks

Low-key reforms, more than FDI and fuel price hikes, would yield dividends

What a difference a month can make. For almost two years the government appeared helpless as growth fell, investment languished, and the rupee depreciated relentlessly. And now, starting mid-September, the government has gone on a reform blitz, dramatically changing investment sentiment.

The key to this change was the formation of a new economic team in Delhi in July. While previously the space for policy action was seen as circumscribed by fragile coalition politics, it was now felt that the eventual political damage from continued growth slowdown and a possible credit downgrade outweighed the risks of upsetting the coalition allies. Rather than blaming the global economic slowdown, the new team focused on domestic policies to counteract its impact.

Markets and corporate India naturally celebrated the policy blitz. But in the last few days, markets have turned more cautious, seeking clarity on where the reforms agenda was heading and what these changes meant for a turnaround in growth.

Added to that is the concern that the data flow over the next two to three months will not reflect the market euphoria. While everyone understands that it takes time for reforms to have an impact, a turnaround in data is needed before the market's patience runs out. A revival in corporate investment is key to this. And it is here that the market is most nervous.

Will India Inc act soon? Is there enough in the reforms to unclog investment? In part, this reflects the sudden unleashing of reforms. One really hasn't had time to step back and separate the wheat from the chaff that several policy changes have glossed over, and which may well turn out to be critical for investment.

... contd.

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