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India's New Government to Continue Economic Reform - 2004-07-11


India's new government has signaled it will continue with reforms that have helped the country become one of the world's fastest-growing economies.

When India's new Congress Party-led coalition was voted into power two months ago, global and domestic business people worried that its communist allies would force the government to roll back economic reforms.

But the government is inviting more foreign investment into key infrastructure sectors - a sign that it will press ahead with progressive market policies.

In its annual budget unveiled a few days ago, the government sharply raised the ceiling on foreign investment in three key areas, such as telecommunications, insurance, and aviation.

Rajesh Jain of Pranav Securities says such measures will attract more investors to India, which offers both a huge market and the potential of high growth.

"India is among one of the rare economies available to a global investor which offers eight percent GDP growth with some amount of credibility," he said. "India offers one of the largest consumer markets in the democratic world, Indian stocks are available at a compelling valuation."

But concerns remain about how the government will fund its ambitious social welfare plans, such as employment programs and cheap credit for farmers.

Economists say billions of dollars committed to these measures could increase a fiscal deficit that is running at about 4.5 percent of GDP. C.D. Wadhwa, an economist at New Delhi's Center for Policy Research, says the government will struggle to implement its those plans.

"Only questions are two-fold; where will they find the money, and secondly, no matter how much money they give, how well they spend it? How much it reaches the targeted sections of society?" he asked.

Economists say improving infrastructure and cutting the deficit are key to sustaining growth.

For more than a decade India has liberalized trade laws, allowed greater foreign investment, and begun modernizing its banking system. Economists say the changes have fueled a powerful economic expansion.

India's economy grew at more than eight percent in the past fiscal year, ending March 2004, and is projected to grow at least six percent this year.

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