New Delhi: The Narendra Modi government faces the significant challenges of tepid economic recovery and slow pace of job creation in 2018, says Richard Fenning, global CEO of Control Risks, a risk consultancy that helps organizations manage political and security risks. In an interview, Fenning said the Modi government now needs to push for politically difficult land and labour reforms to further boost economic growth.
What are the risks and opportunities that the Narendra Modi government is facing currently?
The main risk to the Modi administration in 2018 is likely to be the slow pace of economic recovery and the challenges in creating enough new jobs in the run-up to the 2019 general elections. While the government’s announcement in October to inject $32 billion to recapitalize the banking sector will boost lending and consequently give a fillip to growth over the coming quarters, we expect job creation and up-skilling workers to continue being major challenges for the Modi government.
As far as opportunities go, Control Risks sees no major challenge to political stability at the federal level with the Modi administration firmly ensconced in power. Coming on the back of the improvement in the World Bank ease of doing business rankings and the ratings upgrade by Moody’s, we at Control Risks think this is a great opportunity for the government to stay the course by continuing to simplify business procedures and pressing ahead with the wider reform agenda over the coming year.
Has India’s 30-rank jump in the World Bank’s Doing Business report changed perceptions of global investors?
India’s substantial jump of 30 places on the ease of doing business rankings comes on the back of a range of reforms undertaken by the Modi government since coming to power in 2014. These include fuel subsidy reforms, introducing a landmark Insolvency and Bankruptcy Code, power sector reforms aimed at reducing the debt burden of state discoms and the implementation of GST (goods and services tax) earlier this year. While these rankings do absolutely help to create a positive mood around the India story, investors do tend to take a longer view of things, including assessing the investment climate at the ground level, where we continue to see significant variations between states in terms of the business environment.
How would you rate the current government’s fight against corruption and black money? Would you say corruption has come down under the current administration compared to the previous one?
We think the recent government initiatives, such as the partial digitalization of government licences and permits, are reducing bureaucratic red tape and avenues for corruption at the federal level. Moreover, efforts to reduce the role of cash in India as evidenced by demonetisation and channelling of subsidies through direct cash transfers signal a broader move towards expanding the role of the formal economy, which we believe is likely to help reduce corruption and black money in the longer term.
We have not seen any large-scale corruption come to light in recent years and the government has been successful in carrying out a series of transparent auctions of telecom spectrum and coal blocks. However, India continues to rank 79 out of 179 countries and territories in Transparency International’s 2016 Corruption Perceptions Index, suggesting that corruption remains a major challenge, very often prevalent at most stages in the business cycle and particularly pronounced at the lower levels of the bureaucracy and government. So the glass there is very much half-full.
How do you see the Make in India pitch by the Indian government? Do you see it taking wing?
We have very much taken note of Prime Minister Modi’s Make in India pitch. However, for the government to fully realise its objectives in this regard, it will need to simplify onerous laws around land and labour. This would help to give the boost necessary for large-scale manufacturing to really take off.
Now that GST has been implemented, what are the other reform measures that India should be focusing on?
India should continue simplifying business procedures for foreign companies. Our clients still report critical delays in getting licences and renewals of key permits in India compared to other countries. Other reforms—and I do recognise that some of them are politically-contentious—include land and labour reforms, further reforming the subsidy regime such as for fertilisers and privatisation and restructuring of ailing SOEs (state-owned enterprises).
How much of a risk is rising oil prices for the Indian economy?
Considering that India imports almost 75% of its crude oil requirements, any rise in global oil prices will increase India’s oil import bill, which will in turn put pressure on both the country’s fiscal and current account deficits. There is also a risk that it might adversely affect India’s public finances as well as the rate of economic recovery more broadly over the coming year.
What does the rise of China mean for India? Is China’s Belt and Road Initiative a potential threat for India or an opportunity?
The rise of China is hardly a new trend and has been taking place for over a decade now, and this is likely to continue creating new opportunities and risks for other international partners, including India. A key challenge will be to ensure that China’s rise continues to be largely peaceful with China broadly conforming to a rules-based international order. India has already shown a lot of maturity and pragmatism in the way it has prioritized its economic relationship with China even as it seeks common ground over longstanding border disputes and other regional geopolitical issues and that is encouraging.
China’s Belt and Road Initiative has the potential to significantly upgrade physical infrastructure and connectivity across the South and Central Asian regions, which historically have been less integrated than other sub-regions in the world. In the long term, this could be an opportunity for India as it would increase regional mutual inter-dependencies and economic opportunity by boosting regional supply chains and creating new markets for India.
How do you view the new phrase “Indo-Pacific cooperation" coined by the US administration?
It comes on the back of growing strategic convergence between the US and India in recent years and does signal a greater willingness on the part of the US to accord a more prominent role for India in the Asia-Pacific. This dives neatly into India’s own Act East policy which has seen India shore up relations across key countries in the region including Japan, South Korea, Singapore, Vietnam and Australia.