For growth, focus on US and Japan, avoid Eurozone: S&P economist

India should look to the US and Japan for growth, and reduce its dependence on the Eurozone for some time, says Paul Sheard, Chief Global Economist at ratings agency Standard & Poor's. He also maintains that growth in India is hobbled by lack of infrastructure development, as well as by tax and property disputes.

Europe is back in recession, despite efforts by its governments to prevent this. "It is not a friendly environment. The US is more friendly. We are much more positive on US growth. And Japan, if it manages structural reform," says Sheard.
 
Apart from gross domestic product (GDP) growth in India falling, foreign investment in infrastructure is also drying up. Sheard claims this is due to multiple concerns, among them subsidies, tax distortions and property rights. (Subsidies on fuel, food and fertilizer taken together amounted to 2.5 per cent of GDP in 2012/13, according to a report from Nomura.) Property rights are of particular concern to Sheard. "There is room to improve property rights, because investors put money into the economy, and if you want those investors to finance long-term projects, infrastructure and others, they have to have the confidence that the assets they own are not going to be appropriated by somebody," he says.

The infrastructure bottleneck can be tackled by deploying India's savings efficiently. "Hong Kong, South Korea, Singapore and Taiwan - the so called "Asian Tigers" - have been very successful at mobilising and then deploying household savings to develop infrastructure," he says. "India needs to improve its domestic savings, so you can fuel and fund more domestic investment, without needing to run such a large current account deficit."

A chunk of India's small savings are in chit funds and other schemes outside the formal banking sector, which are often poorly managed. In April 2013, U.K. Sinha, Chairman, Securities and Exchange Board of India, said that more than Rs 10,000 crore ($1.86 billion) had been raised by such schemes in the country. India's current account deficit stood at close to five per cent of GDP in April 2013.

Dipping into savings could motivate the private sector to save more and invest more in production. "The areas in India where you could get the most dividends are on the public sector side, the infrastructure, and in improving the fiscal side of the economy," he says. The government has set a massive target for doubling investment in infrastructure from Rs 20.5 trillion to Rs 40.9 trillion in the Twelfth Five Year Plan, 2012-2017.

India is among the four countries in the Emerging Markets and Asia-Pacific (ex-Japan) category to have beaten the consensus in its first quarter earnings for the corporate sector, according to a Morgan Stanley report. India's companies have beaten consensus expectations by four per cent, Jonathan Garner and Pankaj Mataney wrote, while Europe, the Middle East and Africa have slumped by nine per cent.

This strong showing can be augmented by focusing on the US economy, with which Indian companies already have strong ties. Infosys, India's third-largest IT services company, for instance, earned 62 per cent of its revenue from North America in 2012/13. Again, US President Barack Obama has said immigration reform is his number one objective, which too will help Indian companies.

 "The US doesn't have the problems the European Union has. In five years, the US economy will be 10 years away from the financial crisis, having fixed a lot of its problems," Sheard said.