While global investors remain upbeat on India’s growth prospects – eight months after Prime Minister Narendra Modi took charge of a new government – they qualify their optimism with caution over the pace of reforms in the country, given its chequered history of implementing reforms, especially those pertaining to foreign investment.
Speaking at the Asia Financial Forum, which commenced in Hong Kong on Monday, Michael Diekmann, chief executive and chairman of Munich, Germany-based financial services firm Allianz SE, said that India had the potential of being one of the pillars of world economic growth but had proven itself to be “investor unfriendly” in the past.
“India is extremely foreign investment unfriendly. There is always opposition to opening up of business (to foreign investment) ,” Diekmann said.
The Allianz chief, whose company has business interests in India in the form of a life insurance and health insurance business each, in partnership with Bajaj Finserv, said that past promises made by previous governments to attract foreign investment into the country had remained unfulfilled.
Diekmann was quick to add that India was “a huge market” and the new government under Modi’s leadership had been taking positive steps towards economic reforms. “Inflation appears to be under control and the central bank has finally reduced interest rates, in line with what everybody had been asking,” he said.
Insurance companies like Allianz have been waiting at least a decade for the Indian insurance sector to be opened up to greater participation from foreign companies. At present, India allows foreign firms to hold a direct investment of up to 26% in an insurance joint venture with a local partner. The Modi-led National Democratic Alliance (NDA) government, which came to power in May, approved an ordinance in December to hike FDI (foreign direct investment) in insurance to 49%.
Ordinance appears to be the preferred route adopted by the Indian government to implement key economic reforms in the face of opposition from other political parties to some Bills that it has introduced in Parliament. It has issued executive orders to pass legislations on eight issues since assuming office.
But eventually, ordinances must be voted on by the Members of Parliament and converted into Acts. That is where the problem lies and global investors are aware of it. Speaking at the AFF, Yasuhiro Sato, president and group chief executive of Japan’s Mizuho Financial Group pointed out that the Modi-led administration was in majority in the Lok Sabha, or the lower house of the Indian Parliament, but in minority in the Rajya Sabha, or the upper house. For a bill to be passed as a law, majority approval is needed from both houses. The political struggle that the NDA government is facing on this account is a cause of concern for investors like Sato.
But business leaders agreed that if these hurdles can be overcome India could have a big role to play in world economic growth. Ding Xuedong, chairman and chief executive of China Investment Corp observed that if India’s economy could manage to grow at 6% this year, it could emerge the third engine of world growth after the US and China.
Diekmann of Allianz stated that if Modi’s government and the Reserve Bank of India continued to deliver on what they have promised, an economic growth rate of 7-7.5% in 2017 was possible and India could play a key part in avoiding the world economy’s overdependence on the US for fuelling growth.