India’s new Modi Government attempts to unshackle economic growth

October 2014 | SPOTLIGHT | FOREIGN INVESTMENT

Financier Worldwide Magazine

India’s newly-elected Prime Minister, Narendra Modi, is acutely aware of the high expectations placed on his government by the Indian electorate as well as the international community – to place India back on a trajectory of high economic growth.

Modi has adopted a two-pronged approach. First, he is pursuing a slew of administrative reforms to expedite project implementation and routine governance matters. Success in harnessing these has begun to meet some expectations, allowing him greater latitude to pursue the more difficult, longer-term task of initiating substantial policy reforms and establishing a stronger and more synergistic centre-state relationship within the overall federal structure.

Pragmatic and efficient governance: Modi’s hallmark

Even before Modi formally took office on 26 May 2014, detailed instructions had been issued to the administrative heads of select ministries to prepare presentations highlighting key priorities as well as diagnosis of their core challenges. Modi personally headed the review of each presentation, and with the Prime Minister’s Office (PMO) monitoring the progress, these government agencies are now working to achieve the specific targets earmarked for the first 100 days, aligned to the targets for the five-year term of the government.

A principal finding of the PM-led review was that a large number of projects were stalled due to the slow and opaque process of review by the Ministry of Environment and Forests (MoEF). Within two weeks, the MoEF announced it would work with the state governments to ensure that reviews are now completed efficiently such that clearances can be granted within 60 days. On 1 August 2014, the MoEF also launched an online system for submitting and tracking clearance applications. This will help expedite the approval of more than 400 projects, with estimated investments exceeding US$70bn.

Another crucial administrative reform was the abolition of the 30 Groups of Ministers (GoMs) and empowered GoMs (EGoMs) set up by the previous United Progressive Alliance (UPA) government to tackle cross-jurisdictional issues involving more than one ministry. Since the GoMs and EGoMs slowed down decision-making considerably, Modi has instructed that the administrative aspects of such issues shall be tackled by the Cabinet Secretariat, while those related to policy aspects shall be referred to the PMO.

Indian markets and foreign investors warm up to Modi’s initiatives

On the monetary front, the Reserve Bank of India (RBI) has indicated its growing confidence in the Modi government’s reform agenda, especially its efforts to address supply-side constraints in tackling stubborn inflationary pressures. While the RBI opted to keep interest rates unchanged, it lowered the statutory liquidity ratio (the proportion of a bank’s deposits to be held in government bonds), facilitating greater liquidity in the domestic market and the borrowing of capital from external markets. According to the latest data compiled by the market regulator, the Securities and Exchange Board of India, net investments by foreign institutional investors (FIIs) into Indian equity and debt markets stood at US$26bn in 2014. About US$2.8bn of investment has come into the equity market and US$3.8bn into the debt market in July alone – the highest inflow for a month so far this year. This indicates a positive bias on the part of foreign investors toward the Indian markets based on the reform decisions by the new government, favourable returns and easy exit options.

Adopting a business-friendly policy stance

In the Union Budget 2014-15 presented on 10 July 2014, the new Finance Minister, Arun Jaitley, announced a host of measures to promote growth and investment. These included seed capital of INR 1bn each for several much-needed programs, increased government spending on infrastructure, tax incentives for savings and investment, and raising FDI limits in sectors such as insurance, railways and defence.

Opposition demands forced the government to appoint a select committee that will examine the operational terms for FDI in insurance before it can be debated and adopted during the next session of the parliament. But the government did manage to secure formal passage of the bills to raise FDI limits in railways and defence up to 49 percent, while mandating Indian management control.

Despite having the world’s largest railway network and being the largest employment generator in India, productivity per employee of the Indian Railways is woefully short of international standards. The government has taken the bold, though unpopular, measure of raising passenger and freight fares, with the plan to deploy the additional revenue to significantly upgrade safety, electronic signals and coach quality. Foreign investment is now permitted in rail operations like dedicated freight lines, high-speed trains and mining and port connectivity, besides allowing up to 74 percent FDI in some projects like construction of new lines, gauge conversion, doubling of lines and maintenance projects under the public-private partnership model.

The Modi government raised the FDI limit in the defence sector from 26 to 49 percent. It reportedly wanted to raise this limit further but had to hold off due to internal political considerations. India’s current annual import bill is over US$10bn – the highest in the developing world – betraying a low level of indigenous defence manufacturing. The government is determined to improve India’s defence industrial base by streamlining procurement norms, providing greater operational control to foreign manufacturers, simplifying procedures for foreign OEMs to source from Indian companies as per the mandatory offset provisions and incentivising technology transfers. It wants top-tier OEMs to form JVs with Indian companies, the Defence Research & Development Organisation or defence public sector units, create skilled jobs, optimise costs and improve performance – lowering the defence import bill and creating a fungible pool of technologies that can meet future defence requirements that, in any case, are assessed within a dynamic threat environment.

Ease-of-doing-business related initiatives

The Modi government has carried forward a welcome initiative of its predecessor UPA regime called e-Biz, which is a portal through which all registered users – foreign and domestic – can make secure payments for a range of public utilities and obtain government receipts without visiting these offices. A new initiative, e-Kranti, seeks to radically improve the delivery of government services while other initiatives aim to facilitate distance education through virtual classrooms, provision of e-visas and boosting the role of technology across various segments of the Indian market. It is similarly extending the ‘right to (timely) service’ to many more areas.

With an aim toward greater financial inclusion, the government has launched Jan Dhan Yojana – a scheme under which it wants every single Indian to have a bank account. Under this scheme, account holders can maintain accounts even at zero balance, get life insurance of INR 30,000 and accident insurance coverage of INR 100,000, and have a debit card. This will enable an employer to deposit salaries directly into employees’ accounts, particularly useful to the uneducated labour force, eliminating a major source of corruption and improving the lives of the poorest section of society.

Looking beyond the first 100 days

The Modi government will complete 100 days in office on 6 September 2014. It has planned a calibrated media campaign where each department will highlight its accomplishments and note its specific ongoing efforts. The leadership wants to improve transparency and accountability, and exhort citizen participation in relevant schemes and enforcement drives.

From the ramparts of the historic Red Fort on India’s 68th Independence Day (15 August), Modi had issued a clarion call to clean up India, including its major rivers, Ganga and Yamuna, improve sanitation and provide toilets in every home and school. The Indian corporate sector responded swiftly, with companies such as TCS, Hindustan Lever, Adani, ITC and the Aditya Birla Group committing INR 1bn each to finance hygienic sanitation facilities for girl students across 10,000 schools in the country. In part, this flood of offers is the result of the new Companies Act 2013, which mandates a 2 percent spend on Corporate Social Responsibility (CSR) initiatives for all profitable companies. Modi’s call for toilets has allowed them to align their need to find outlets for CSR spend with a politically-defined national objective.

The import of the above efforts, or of asking members of parliament to use their development-dedicated funds to create one model village in their constituency each year, stems not just from empowering marginalised sections, but from stimulating demand and creating newer models to make development a more profitable enterprise.

India currently ranks 134th on the Global Ease of Doing Business Index. To improve the national score, the Modi government plans to reform India’s archaic labour laws. Inspired by the Rajasthan government recently amending four key laws – the Industrial Disputes Act, the Factories Act, the Contract Labour Act and the Apprentices Act – the central government wants to follow suit, and in the process improve the ability of employers – domestic or foreign – to hire and fire workers and determine their salaries, benefits and insurance coverage.

Another significant decision is to replace the Planning Commission, created in 1950 and inspired by Soviet-style central planning, with a think-tank of experts drawn from public and private sectors – one that is better aligned to meeting 21st century requirements.

Modi’s style of governance is likened to that of a CEO: careful selection of key personnel, clear targets with specific deadlines, and relentless monitoring. Thus far, his approach seems imbued with his vision of keeping India’s economic growth at the core, strengthening economic and security ties with its South Asian neighbours, a strong Look East policy, and selectively engaging key capital farther ashore.

Over the past two months, New Delhi has substantively engaged US and UK leaders and fellow BRICs leaders. PM Modi has a busy September – starting with a much-awaited trip to Japan where he and Japanese PM Shinzo Abe are expected to outline the contours of the revised Indo-Japanese ties, followed by the visit to India of Australia’s PM Tony Abbott when they are expected to sign a bilateral civil nuclear pact and other agreements to facilitate much-needed imports of high quality coal and natural gas. The following week, Modi will host Chinese President Xi Jinping, with major announcements expected about Chinese companies setting up an industrial park in India and being granted permission to bid for major infrastructure projects across India. During the last week of September, Modi will meet President Obama in Washington DC to boost defence, high-technology and investment ties while making a fresh attempt to address India’s food-subsidy-related concerns and pave the way for formalising the trade facilitation agreement (TFA) in the stalled World Trade Organisation negotiations.

The Modi government is clear that its business-friendly policies will generate resources to expedite India’s all-round economic development, and toward this end, his Independence Day speech also exhorted the international community to make India a manufacturing hub, inviting global businesses to manufacture goods in India with ‘zero defect’ and ‘zero (negative) effect’ on the environment. The track record thus far affirms the Modi regime’s commitment to walk the talk. Time will tell how well the international community responds and how ably the new government is able to calibrate its reforms with long-haul policy changes to spur India’s economic growth and meet rising expectations at home and abroad.

Dr Anupam Srivastava is a senior business adviser at SKP Group, a member of Nexia International. He can be contacted on +91 22 6730 9000 or by email: anupam.srivastava@skpgroup.com.

Dr Anupam Srivastava

SKP Group