Indian outlook rosier, but deeper reform vital

The ADB said last year’s general election, which ended years of revolving-door politics and brought a coalition led by Prime Minister Atal Behari Vajpayee back to power, had renewed optimism in India’s economic prospects.

"The new government has a significant majority and forceful leader with a clear vision to carry out new structural reforms," said the Manila-based bank.

"Simultaneously, a recovery is being sustained, aided by a favourable external environment. Meanwhile, a global technological revolution is helping India benefit from its own `new economy’ boom."

But there were clouds in the clearing skies, with public finance deficits "a serious cause for concern", the ADB said. India is addressing the problem through tax reforms and expenditure cuts, it said, but still it saw the fiscal deficit falling only slightly to 5 per cent of GDP in 2000/01 and 4 per cent the following year from 5.5 per cent in 1999/2000.

The bank said there have been signs of reform fatigue, though India has maintained the broad direction of its nine-year-old economic liberalisation drive.

It said reforms need to be addressed urgently in areas such as fiscal consolidation, the labour market and the power sector. "Of particular importance is the need to expand the reform process to state and local governments," it said.

"Indications are clear that the top levels of the government, as well as the corporate sector, are convinced of the urgency of carrying out economic reforms," it said.

"However, most state governments and the lower levels of line ministries… are neither fully aware of the urgency of the effort nor equipped to implement them."

Institutional weaknesses inherited from the past, such as the bloated and inefficient bureaucracy and the non-responsive legal system, put a question mark over the system’s capability to act on proposed reform measures, the report added.