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The change of guard at the finance ministry has brought in a cautious optimism among investors. In the first few days of the month, stock prices moved up and $1.3 billion of portfolio investment came into India, perhaps reflecting improved investor sentiment. The problems the country faces are, however, far from over, and the prime minister and his team have huge challenges ahead. Macroeconomic difficulties facing India may be exacerbated in the coming months, making it difficult to keep up the optimism.
One of the biggest difficulties facing the government is likely to be bad news on production. Since 2008, when the global crisis began, the investment climate has been poor and worsening. While existing projects were completed, new project plans, both public and private, slowed down. Even if the investment climate improves, and the government and the private sector start planning to invest again, it could easily be two to three years before these translate into higher investment. After projects are planned, it takes time to get various clearances and tie up the finances to execute them. These are not necessarily delays but part of project execution, even when all processes are moving smoothly. So even an improved investment climate will not translate immediately into higher investment spending.
Meanwhile, the slowdown in new investment plans in the last four years is likely to lead to lower investment in the pipeline. Lower investment is likely to translate into lower output and unemployment. The quiet decline in investment plans that has been happening over the last few years could translate into a shrill discussion on slipping industrial growth and poor corporate performance on every business channel. It will be a constant challenge for the government to offset the gloom and pressure caused by the bad news. There will need to be more than a slow trickle of reforms. It will not be enough to follow a policy of "do no harm".
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