As the Modi administration completes two years, it’s but fair to say that the government while tempering expectations, realizing the challenges on political and economic fronts, is laying a steady and robust foundation for economic reforms. The Economist aptly sums up the Modi government’s achievements by underpinning the fall of “rent-seeking” trends in India’s bureaucracy. Improved rating in the 2015 World Bank report and World Economic Forum’s index on business competitiveness speak for themselves on achievements thus far. With sustained growth momentum, India is in a sweet spot, pulling its weight to positively influence growth trends in the region, given the slowdown in China.
Among crucial achievements, a proactive foreign diplomacy, unprecedented emphasis on attracting FDI (foreign direct investment) and foreign institutional portfolio investors without jeopardizing prospects of a “Make-in-India” pitch, progressive legislation and decisive executive actions stand out. Macroeconomic indicators project a clearer picture on fiscal discipline, with short-to-medium term GDP growth strategy range-bound between 7.5-8%. Structural reforms in the form of subsidy management and distribution, and social security platforms (Jan Dhan Yojana) combined with financial inclusion will certainly yield long-term results. Steady growth in foreign exchange reserves and benign inflationary trends are encouraging, as the government reaffirms its commitment to growth in public spending, particularly on roads, ports, railways and rural electrification.
The government’s diplomacy has led to a rise in the country’s stature; India’s demands for a permanent seat in the UN Security Council and membership of the Nuclear Suppliers Group now appear closer to realization. As the world takes note of India’s economic resilience, a gush of foreign investments has been witnessed over the past 24 months. Latest OECD (Organisation for Economic Co-operation and Development) statistics show FDI in India grew by 31% in 2015, as compared to a decline in major emerging economies including Brazil, Russia, China, South Africa and Indonesia.
Independent surveys suggest an unprecedented climb in foreign inflows which permit tapping potential of key sectors such as insurance, defence, retail trade and pharmaceuticals. In tandem with equity market reforms, the charismatic central bank governor has shown the way for conservative though sensible monetary policy and debt market reforms. The government’s bold initiative for liberal foreign borrowing guidelines has allowed wider access to relatively cheaper sources of debt for infrastructure project development, given restricted ability of Indian financial institutions.
On structural reforms, a host of legislative and policy reforms with stress on innovation in sectors such as railways, roads, coal and energy seem to be the mantra of Prime Minister Narendra Modi’s colleagues. Most recently, enactment of a comprehensive insolvency and bankruptcy law underlines credibility of the government’s endeavours to address balance-sheet woes of public sector banks, force delinquent borrowers to rearrange their balance sheets and kick-start stalled projects.
The legislation promises an entrepreneur-friendly legal framework for speedier, transparent and efficient resolution of corporate insolvencies, and will inspire confidence (of investors) in stalled infrastructure projects, innovation-intensive and risky start-up ventures. Amendments to the SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) law and debt recovery statute will allow investors time-bound exits, and recalibrate distressed and non-performing investments. Amendments to the Arbitration Act will facilitate speedier resolution of commercial disputes. Enactment of a real estate law is a big leg-up for the industry to establish accountability and protect consumer interest.
New defence procurement procedures and a draft national civil aviation policy are milestone moves in India’s aerospace and defence industries which hold untapped investment potential and consumer interest. An overhauled hydrocarbon exploration and licensing policy regime heralds a change from a profit- to revenue-sharing model and a way to avoid disputes that have historically plagued interests of international investors in this important sector. A regulatory framework for start-ups is expected to lay a strong foundation for a rapidly growing industry which holds potential for growth of entrepreneurship and employment generation.
Tax policy and administrative reforms have been at the forefront with bold budgets and successive administrative announcements. Beginning from the 2015 budget, tax proposals and legislative amendments have been calibrated with a view to providing a predictable and transparent regime, both to domestic and foreign investors with focus on taxpayer service. While the government has been adhering to its promise to refrain from retrospective legislations, its announcements have instilled confidence in tax administration. With G20’s Base Erosion and Profit Shifting (BEPS) project led by OECD taking centre stage, it is clear that the tax policy stance on General Anti-Avoidance Rules (GAAR), transfer pricing documentation, tax treaty abuse, transparency in information sharing, dealing with tax crimes, etc., will be to align domestic policies with global best practices. Recently introduced equalization levy for e-commerce enterprises, enhanced documentation requirement for transfer pricing, impending GAAR legislation and amendments to the India-Mauritius tax treaty are obvious fallouts of BEPS initiatives.
Though the goods and services tax (GST) legislation continues to hang fire, its passage never seemed as close as it appears now. Both GST and the land bill have been obvious casualties of the government’s lack of legislative majority in the Upper House. However, the record of bills passed in last two Parliament sessions has given a sense of optimism to investors. The success factors for the future lie in keeping up the momentum to increase public expenditure, actualize reforms in public sector banks, implementation of several flagship schemes, and a thrust on infrastructure and social sectors.
The overall verdict will depend on a philosophical question: Does one see the glass half full or half empty? Considering where the economy stood in 2014, I certainly see the glass more than half full as the new government comes close to completing its first innings.
With assistance from Sumit Singhania.
Mukesh Butani is managing partner at BMR Legal. The views expressed here are personal.