India: Capital Market Reform Key to Infrastructure Needs

India needs reform its capital and labor markets to meet its growing infrastructure needs, according to the International Monetary Fund. In a commentary published in India’s Business Standard, IMF Senior Advisor Kalpana Kochhar outlines what the Indian government must do in order to meet its goal of investing $500 billion in its infrastructure by 2012.

Over the past three years, India has invested an average of 4½ percent of GDP each year in infrastructure. Getting to the Planning Commission’s target -which is estimated to be the equivalent of 9 percent of GDP in 2011/12- means that infrastructure investment will need to increase by nearly 1 percent of GDP each year between 2007/08 and 20011/12 percent of GDP, Kochar writes.

Where will the resources to finance this additional investment-nearly 5 percentage points of GDP by 2012-come from?

Examining India’s public financial health, Kochar concludes, “From dissavings of around 1 percent of GDP a decade ago, public sector savings shot up to an impressive 3 percent of GDP in 2007/08. But given the pressures from the 6th Pay Commission, the agricultural loan waiver, and continued commodity subsidies it will likely be difficult to increase or even to maintain this level of savings in the absence of substantial improvements in tax revenue collection.”

Not surprisingly, the IMF argues that the government can not afford to invest adequately in its infrastructure without foreign capital, and that foreign capital can not be acquired without a significant re-tooling of India’s financial and labor markets.

India needs to rethink its capital account framework in the light of the need for $500 billion in infrastructure investment.

Specifically, Kochar reccommends, “refraining from ad hoc changes in capital controls in the name of macroeconomic management, and quickly expanding the country’s real and financial absorptive capacity.

In particular, there is an urgent need for an expedited and time-bound plan to develop the corporate bond market, including by raising the limits on foreigners’ participation in this market, permitting greater capital outflows, creating fiscal space to finance infrastructure investment by curbing wasteful spending, and implementing structural reforms of labor and product markets.

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[globalmacro]

Amen