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Indian economy: shackled giant or Asia's new tiger?

Surojit Gupta in New Delhi

A decade after launching free market reforms, the Indian economy is still a dot on the map when it comes to attracting foreign investment.

As the world's richest nations meet in New Delhi for a two- day G20 meeting on Friday, Indian policymakers will put their best foot forward to try to showcase the attractiveness of Asia's third-largest economy.

When it comes to luring foreign investment, India trails far behind China, which attracts $30-$40 billion annually. New Delhi, by contrast, draws a scant $3.0-4.0 billion.

While India can boast of many positives -- rising exports, growing industrial output, buoyant tax revenues and large foreign exchanges revenues -- it also has a string of negatives.

"We don't have the required infrastructure yet to absorb the kind of money flowing into China as foreign direct investment," said Nikhil Khattau, CEO of Sun F&C Asset Management, which has over Rs 1,000 crore (Rs 10 billion) invested in Indian markets.

India's privatisation programme, one of the few areas of real progress in its economic reform drive, is stalled because of a deep cabinet rift over the pace of the sell-offs.

Poverty trap

Analysts say the government must press ahead with aggressive privatisation of state-run firms, deregulation, reform of archaic labour laws, reduction of its huge fiscal deficit and lowering of tariff barriers that are still among the highest in the world.

"India can be a roaring tiger if all these problems are taken care of," Amit Mitra, secretary general of the Federation of Indian Chambers of Commerce and Industry, told Reuters.

Economists say reforms are crucial if India is to increase growth from 5.4 per cent and reduce poverty in a country, whose population of more than one billion is second biggest after China.

A World Bank study estimates eight per cent of the world's poor live in Uttar Pradesh, India's most populous state with 166 million people. It says the population risks falling further into the poverty trap if reforms fail to take off.

"Because Uttar Pradesh is very large -- larger than many countries -- and very poor, meeting this challenge is important not only for India, but is also of global significance," the study says.

There are also other hurdles keeping the economy from realising its potential and leaving little room for credit rating agencies to upgrade India's ratings that are at junk levels.

Analysts say Indian policymakers and politicians are not committed enough to implementing radical reform measures because of fears of upsetting voters.

Stable financial regime

"Chinese policymakers are serious with whatever they set out to do, but somehow we tend to be non-serious when it comes to implementing policy decisions," said ICRA's Chaudhuri.

Still, all is not gloom and doom for India.

A slew of recent data shows a demand slowdown that gripped the economy last year is tapering off and a revival under way despite the country's worst drought in 15 years.

"There are many positives. We have a stable external sector, a stable monetary and financial regime and a rejuvenated corporate sector ready to face the globalisation challenge," said ICRA credit rating agency economic adviser Saumitra Chaudhuri.

Also, despite the global slowdown and fall in demand in the United States, "our exports are growing as we have developed core competencies in textiles, gems and jewellery, small machine tools," adds FICCI's Mitra.

However, India must improve its creaking infrastructure and revive reforms in the power sector if it wants to catch up with the economic challenge posed by China, which began its long march to the market in 1979, analysts say.

"At present, we have an edge over China in software services, but if we fail to evolve and move up the value chain, even that position could be threatened," said Nikhil Khattau.

India is this year's host of the G-20, which was established in 1999 in the wake of the emerging markets financial crisis of the late 1990s. It brings together finance ministers from industrialised and developing nations to discuss policy issues concerning international financial and economic stability.

(Additional reporting by Denny Thomas in Mumbai)

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