India should push reforms, cut deficit

Bank of America-Merrill Lynch country head Kevan Watts speaks during Reuters India Investment Summit in Mumbai November 23, 2009.

MUMBAI (Reuters) - India, whose protected financial system helped insulate it from the worst of the global downturn, should not be complacent in its push for reforms in the sector, the top country executive at Bank of America-Merrill Lynch said.

"One thing that does worry me is that the conservative nature of Indian regulation. That may persist longer than it would otherwise have done because of the financial crisis," Kevan Watts, India head of Bank of America Merrill Lynch (BAC.N), told the Reuters India Investment Summit on Monday.

The rousing re-election of the Congress party-led government in May, which freed it from dependence on communist allies, lifted hopes of an acceleration in long-delayed financial reforms that would expand participation by overseas players and increase opportunities for domestic and global investors in India.

But the global financial meltdown dampened Indian appetite for financial liberalization, especially as limits on foreign banks and active regulation of the financial sector were seen as sheltering it from the depths of the downturn.

Srinivasan Varadarajan, executive director at private sector lender Axis Bank (AXBK.BO), said what's more important is for India to reduce its fiscal deficit, which is on track to reach 6.8 percent of GDP this year, a 16-year high, and improve its infrastructure.

He said India's external position is otherwise strong, with ample reserves and little short-dated debt.

"Whether things happen in terms of opening up some sectors which are specific for foreign investors or not -- it'll happen at some point of time," Varadarajan told the Summit.

"But whether it happens now or it happens 12 months, 24 months from now -- I don't think broadly the complexion of the market or the growth story as far as India is concerned is going to change dramatically," he said.

India has attracted $15 billion in portfolio inflows so far this year and its economy is on track to grow at about 6.5 percent in the fiscal year that ends in March, roughly in line with last year's 6.7 percent but short of the 9 percent or more recorded in the previous three years.

Sam Ghosh, chief executive officer of financial services conglomerate Reliance Capital (RLCP.BO), told the Summit that he was confident of winning government approval for the listing of its Reliance Life unit, which would become the first life underwriter to go public in India.

A banking license for Reliance Capital, however, is a more distant prospect, he said.

"Obviously for a group like us we need a banking license," Ghosh said. "Industrial houses cannot own a bank. Banking would be the area of focus if we can get a license," he said.

REFORMS AND OPPOSITION

Last week, protests by tens of thousands of sugar farmers forced a postponement of the winter session of parliament, underscoring the difficulty of pushing through reforms such as price deregulation in a country where the electorate is mostly rural and poor.

"The danger is, that if you like, India will rest on its laurels of having circumvented the crisis well," Watts said.

Watts said financial reforms could help India's large savings to make its way into productive investments.

India has about $400 billion in domestic savings, but little is funnelled through the banking channel currently to fund, for example, the country's huge requirements to build infrastructure.

Watts said encouraging more domestic participation in its equity markets would also help to counter the impact of foreign investment flows. An influx of funds has prompted officials in Brazil and Taiwan to take steps to curb inflows and put officials in other emerging markets, including India, on alert.

Indian institutional investors lack muscle to counter rapid fund flows. For instance, government pension funds are not allowed to invest in equities, while investment by private pension funds is limited to just 5 percent of assets.

Financial reform is "not about whether foreigners can own 49 percent of life insurance joint ventures or 26 percent," Watts said. "Perhaps the most important thing that the Indian government can do is to encourage the further development of domestic Indian institutional investors," he said. (For summit blog: blogs.reuters.com/summits/) (For all summit stories:

here) . (Editing by Jean Yoon)