Governance, Inflation Hit FDI Flow.

NEW DELHI: Governance and inflation have emerged as key risks for India. These factors are denting investor confidence and foreign direct investment flows which have slowed in recent months and are unlikely to bounce back unless more sectors are opened up and policies streamlined, a report showed on Friday.

A slew of scams that made headlines last year, high inflation and a policy paralysis as a result of corruption allegations have impacted business confidence. They have the potential to hurt growth in the coming months if immediate steps are not taken to reverse the trend, analysts said. Parliament's winter session was washed out after opposition parties refused to relent on their demands for a joint parliamentary probe into the 2G scam.

Several key economic reforms such as further opening up of retail and insurance business to greater foreign participation, land acquisition for infrastructure, direct and indirect tax reforms and food security are pending. Although these issues have a greater impact on the long-term growth story, continuation of this political deadlock in the near-term could engender further investor pessimism over these much-required reforms.

In the process, both FDI and foreign institutional investor (FII) flows could be affected, Standard Chartered Bank economists Samiran Chakraborty and Anubhuti Sahay said in their report on India. The report said the delay in implementing critical economic reforms and hesitant bureaucratic decision-making are the outcomes of a spate of alleged scams, which could act as a drag on investment momentum. FDI inflows during April to November remained stagnant around $19 billion while FII inflows continue to be robust.

The report says if public sector infrastructure project approvals are not speeded up even projects in the private sector could slow down considerably and tightening up of domestic regulations could force companies to look for business opportunities abroad. The results of the five state elections later in the year could impact the government's appetite for reforms and policy. West Bengal, Tamil Nadu, Kerala, Assam and Puducherry face elections. It would be interesting to see how the ruling coalition positions itself on the twin issues of inflation and corruption before these crucial state elections. If it fares badly in these five state elections, then political pressure on it could mount. Such a backdrop would not be conducive for implementing radical reform, the report said.

It said foreign investors are concerned about the number of projects being delayed because of stricter implementation of environmental regulations. The report said Inflation and governance risks cloud India's 2011-12 economic growth outlook and growth maybe lower than 2010-11. "We see downside risks to our current 8.8% GDP forecast but concerns about a collapse in growth in FY12 are misplaced," the report said. The spate of scams has forced several foreign investors to stay on the sidelines and experts say India needs to significantly improve its governance record. You hear Indians and investors discuss it. Of course, it does affect but it does not overcome all the positives.

This is one area in which there is scope for improvement of the Indian economy, John Lipsky, first deputy managing director of the International Monetary Fund, told TOI in Davos when asked whether corruption would impact investor sentiment.

Source : timesofindia.indiatimes.com