Global investment banker JP Morgan has warned that politics is taking a toll on economic reforms and the news flow on economic reforms will be disappointing.Following a decent start after it came to power last year, the government’s economic initiatives have lost considerable momentum in recent months. ‘‘The resistance from the Leftists is widely blamed for this,’’ it said in a report.However, disappointment with the pace and scope of economic reforms is unlikely to derail the current upbeat economic momentum, but will limit the economy’s ability to grow faster than 6-7 per cent per annum over the medium term.As with previous governments, domestic politics will impact the pace and scope of economic reforms and policy makers once again will probably be unable to fully unlock and capitalise on the Indian economy’s growth potential.Additionally, Prime Minister Manmohan Singh’s economic initiatives need to be balanced with the political considerations of Congress President Sonia Gandhi. Though not anti-reforms, Gandhi appears to be placing greater importance on political management, even if that comes at the expense of economic reforms, the report said.‘‘Unfortunately, reformist Singh is beginning to disillusion followers who expected him to deliver on economic reforms. More disturbing are populist schemes that are now being favored by the government,’’ it said.Today, the government said in Parliament that the privatisation process is on hold.It further said the recent devastation in Mumbai and Maharashtra owing to floods will not hurt the optimism of foreign and local investors. Merchandise trade was likely hit temporarily in July by the inaccessibility of ports, but trade flows should rebound in August as port operations return to normal. JP Morgan says the Indian economy is likely to grow 7 per cent in 2005-06, the second-fastest growing economy after China.Economic growth will be driven by strong gains in consumer spending, and by the ongoing pickup in capital expenditure, infrastructure spending, and exports. With the monsoon season rainfall 5 per cent above normal as of August 3, the current economic momentum is likely to be maintained, it said.Indeed, recent corporate earnings have been better than market expectations, and the current strong economic rebound will ensure an attractive backdrop for Indian equities. However, investors should bear in mind the negative impact of a possible hike in local fuel prices, it said.Oil economicsMUMBAI: JP Morgan has estimated that every $10 per barrel rise in the price of oil will increase India’s current account deficit by $6.6 billion. Government subsidy has prevented the complete pass-through of higher international oil to local fuel prices. But it said the higher oil import bill has helped offset upward pressure on the rupee from strong foreign capital inflows. The rupee has not moved much since the start of the year, despite strong net inflows into the equity market in the current year ($7.3 bn as of August 11), and the absence of substantial intervention by the RBI for most of the year. — ENS
