The Narendra Modi government has been "slow" to match its rhetoric in economic reforms, the US State Department said in a report yesterday.
Many of the reforms proposed by the government have struggled to pass through parliament, the report noted, adding that this has resulted in many investors retreating slightly from their once forward-leaning support of the BJP-led government.
According to the report, the government failed to muster sufficient political support for land acquisition bill in parliament, while the Goods and Services bill - dubbed the most significant tax reform since independence - is still being negotiated.
There are few quick fixes to the structural impediments, poor regulatory environment, tax and policy uncertainty, infrastructure bottlenecks, localization requirements, restrictions in many services sectors, and massive shortages of electricity that hinder India's economic growth potential, the report noted.
The report titled "Investment Climate Statements for 2016" also questioned India's 7.5 per cent growth rate. India's GDP data has been doubted by many economists, who have complained that the headline number does not reflect the economic sentiments on the ground.
"Ostensibly, India is one of the fastest growing countries in the world, but this depressed investor sentiment suggests the approximately 7.5 per cent growth rate may be overstated," said the report produced by the Bureau of Economic and Business Affairs of the State Department.
However, the report was "highly" appreciative of the measures taken by the Modi government in areas like bureaucracy and foreign direct investment.
The government last month had eased FDI norms in pharma, aviation and defence sectors in a major reform move. PM Modi had hailed the sweeping liberalisation of foreign direct investment rules, saying they would make Asia's third-largest economy the most open in the world.
It also noted that the current government has made some progress in fulfilling its mandate to build a cleaner, more market-oriented, and more competitive India.
"India's image as an investment destination was tarnished in 2010 and 2011 by high-profile graft cases in the construction and telecom sectors, exacerbating existing private sector concerns about the government's uneven application of its policies," the report said, adding there is now more clarity on the regulatory front.
The State Department said the 2014 election marked a turning point in investor sentiment, as a fractured minority government, seemingly unable to advance essential economic reforms, was displaced in favour of a government that had won on a platform of economic growth.
"Additionally, the monetary stewardship of Raghuram Rajan, the respected Governor General of the Reserve Bank of India, further boosted investor sentiment," the report said.
Despite progress, the Indian economy is still constrained by conflicting rules and a complex bureaucratic system that has broad discretionary powers, the report said.
"India has a decentralized federal system of government in which states possess extensive regulatory powers. Regulatory decisions governing important issues such as zoning, land-use, and the environment vary between states. Opposition from labor unions and political constituencies slows the pace of land acquisition, environmental clearances, and investment policy," it said.