SENSEX NIFTY
May 28, 2012, 12.53 PM IST | Source: PTI

It's clean-up time for Indian economy: Analysts

Amid concerns over a perceived policy paralysis in India, a leading domestic research firm has expressed hope that the much-criticised recent actions of the executive, judiciary and regulators would actually prove to be a 'clean-up' job and help economy's revival in long run.

Amid concerns over a perceived policy paralysis in India, a leading domestic research firm has expressed hope that the much-criticised recent actions of the executive, judiciary and regulators would actually prove to be a 'clean-up' job and help economy's revival in long run.

"Investors may worry about a bigger role of the Indian executive, judiciary and regulators in business affairs and find it retrograde and interventionist.

"We view this in a positive light, as necessary cleaning up of an archaic system that thrived on contacts, corruption and cronyism," senior analysts of Kotak Institutional Equities said in a new report.

While admitting that the current state of policy inaction could make India pay a price for past excesses through lower GDP growth over the next 1-2 years, the analysts said they "see this as a cross to bear to get rid of a system that fostered corruption in all facets of economic activity."

The strongly-worded report by Kotak Institutional Equities, one of the largest equity research firms in the country, has come at a time when most analysts and financial market research firms are criticising the so-called policy inaction in the country in the strongest possible manner.

Incidentally, Kotak Institutional Equities is one of the few domestic entities among the top institutional equity research firms in the country, which mostly includes foreign players, and would be probably be the first to have seen some silver lining in the prevailing situation.

Besides, overseas financial services sector entities and consultancies, a host of local corporate giants as well as industry leaders and economists have also been criticising the slow pace of reforms in the country.

The issues like retrospective amendments to some tax rules and decisions like cancellations of telecom licenses have faced strong criticism by many, who have termed them as steps that are 'retrograde' in nature and as detrimental to the country's economic growth.

Taking a contrarian view, Kotak Institutional Equities termed the scenario as "a brave new India" and said it sees some of recent actions of the "Indian executive, judiciary and regulators as an attempt to restore the primacy of law and democratic institutions in India."

"We hope for an equitable, inclusive and transparent development model after eradication of a system based on corruption, cronyism and dysfunctional systems. It may have resulted in strong economic activity but it also extracted very high invisible costs from the Indian economy and society," the report said.

Many of the recent decisions, no matter how retrograde they may appear, were vital to restore the credibility of India as a serious investment destination and should be seen as measures for rectification of past mistakes, Kotak analysts noted.

A top executive at a foreign equity research firm, which has substantial presence in India, conceded that there were some flaws in strong lobbying against various recent actions taken by the government, regulators and other authorities.

"The actions are mostly being opposed because of their immediate impact on foreign investments having been made or to be made in India," said the executive, who declined to be identified.

"If the government persists with these decisions, the foreign players could be hit in the near future, but these could be helpful in creating a strong domestic investment climate in India," he said, adding that the steps could be ahead of time due to lack of any such climate in the country.

Kotak analysts said they "hope the current period of policy inaction in India reflects a transition to a better system of doing business in India, a system based on transparent policies, processes and regulations."

"We welcome the eradication of certain business practices that exploited regulatory and policy deficiencies in certain sectors," they noted.

Among the global financial sector giants, Nomura recently said that MNCs repatriated FDIs worth USD 10.7 billion by sale of their Indian assets in 2011, amid problems like slowing economic growth, rising business costs and regulatory uncertainties and noted it was not a "good sign".

Government data shows that India attracted foreign direct investment (FDI) worth USD 27.57 billion in 2011, higher than USD 21 billion in 2010.

Joining the league of doomsayers, Goldman Sachs and Bank of America-Merrill Lynch last Friday steeply scaled down their GDP estimates for the Indian economy to 6.6 and 6.5%, respectively.

These estimates came within days of Morgan Stanley and StanChart revising downwards the country's growth forecasts for the current fiscal to 6.8 and 7.1%, respectively.

All these forecasts are drastically lower than the government forecast of 7.6%.

Goldman Sachs had revised forecast "largely due to a weaker investment outlook in part driven by domestic policy uncertainties and more back-ended and lesser monetary policy easing, and in part by prevailing global uncertainties."

While Morgan Stanley analysts said, "With policymakers continuing to delay action to address the unsustainable bad mix of growth, we now think that GDP growth is likely to face another leg down."

Kotak Institutional Equities said India's political leadership must choose between politics and development and the current "halfway model will neither eradicate corruption nor result in strong economic growth."

ADS BY GOOGLE

video of the day

Rupee weakness modest, see yields at 7.60% in Q1: Deutsche

Explore Moneycontrol

Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.