Parul
India’s reform agenda may help to support medium-term growth and partially offset downside pressures to investment from renewed asset-quality challenges in the financial sector and damaged corporate balance sheets, said Fitch Ratings.
Labour market reform aims to improve worker access to social security (notably in the large unorganised sector), strengthen occupational safety requirements, speed up the resolution of labour disputes and ease migrant workers’ ability to move between states.
Employers will now need state government approval for redundancies only if employers have more than 300 workers, up from 100 previously.
“These changes could support formalisation of India’s labour market and improve its flexibility and efficiency,” said Thomas Rookmaaker, analyst at Fitch Ratings.
Another reform in the pipeline relates to the agricultural sector with new legislation aiming to enhance efficiency, by giving farmers more flexibility over where to sell their produce by stripping out middle men.
“This has the potential to improve farmer incomes and reduce consumer prices,” said Rookmaaker. But implementation risks are significant and the Supreme Court in mid-January suspended the relevant laws to facilitate a review and airing of farmer grievances.
Segments of the farm lobby have protested for months, apparently over fears that the reform could result in abolition of minimum support prices, although the government has said this will not happen.
“We expect India’s central government to remain generally reform-minded over the next few years, and potential areas for further reform seem plentiful, in our view. However, the process of reform in India remains very complex, and implementation at times has proven difficult.”In recent years, said Rookmaaker, the government has opened more sectors to FDI but has also raised barriers to international trade.
Meanwhile, the Insolvency and Bankruptcy Code — a landmark reform from the government’s previous term — has been suspended temporarily in line with forbearance regulations for banks.
“We estimate medium-term growth potential to be some 1.7 percentage points lower than otherwise as a result of the scarring effects of the health crisis and financial sector weaknesses,” he said.
“Our projected annual medium-term GDP growth is relatively high, nevertheless, at around 6.5 per cent reflecting above-trend growth rates needed to close the output gap,” said Rookmaaker.
However, Fitch added that weak implementation of the reforms combined with continued financial sector problems could lower growth potential below the current estimates.
