India needs ‘quantum step’ in investment

India’s central bank governor has warned that the country needs a "quantum step" in investment to achieve the ambitious double-digit economic growth rate forecast by Manmohan Singh, the Indian prime minister.

The warning from Duvvuri Subbarao flies in the face of the growing belief in India and overseas that the country can outpace China by moving from its current 8.5 per cent growth to 10 per cent growth over the next three to five years.

“India needs to raise its investment by a quantum step if it is to realise its aspiration of a double-digit growth,” Mr Subbarao said in an online forum hosted by the Financial Times.

His comments also highlight India’s need for greater foreign direct investment at a time when short-term capital inflows to emerging markets are rising quickly.

“We certainly need to augment our domestic resources with foreign savings . . . We have a preference for long-term funds over short-term funds, for equity over debt, and for FDI over portfolio flows.”

Mr Singh has forecast that India will reach 10 per cent economic growth in the medium term, placing it on a par with Chinese levels of expansion. His senior officials argue that double-digit growth can be achieved without additional major structural reforms, such as those encouraging higher levels of foreign investment, or simply by improved performance in the lagging agricultural sector.

Leading investment banks like Japan’s Nomura and US-based JPMorgan also predict that India's domestic consumption boom can help propel its economic growth higher than China's in coming years.

Rob Subbaraman, chief Asia economist at Nomura, said India stood a strong chance of surpassing Chinese growth rates as Beijing rebalanced its economy from investment-led growth to one supported by more domestic demand. Adrian Mowat, JPMorgan’s chief Asian strategist, agreed that India had a “real possibility” of growing faster than China.

“When you look at risk-adjusted growth, India is looking pretty attractive compared to China,” said Mr Subbaraman. “It’s much more difficult for China to sustain growth rates.”

Whereas China’s investment rate is about 55 per cent of the size of the economy, India’s is about 35 per cent.

The central bank governor’s comments are a striking reminder that there is real concern that investment in infrastructure and corporate expansion is badly trailing growing demand in a country of 1.2bn mostly young people. High inflation fuelled by supply constraints and a widening current account deficit threaten to put a drag on India’s performance.

Supporting the view of the central bank governor, Jeff Immelt, chief executive of General Electric, last week criticised India for stifling investment opportunities in infrastructure and for failing to execute large projects in sectors like energy and transport.

“Our infrastructure investment needs are huge,” said Mr Subbarao. “The concern though is that infrastructure, by its very nature, needs long term finance, and volatile flows chasing short-term returns do not meet the need.”