The Modi Government: Two Years On

As Prime Minister Modi approaches the middle of his first term, Ayena Gupta of the UKIBC explores how his Indian Government is unleashing India’s economic potential and what it means for UK businesses

Two years ago, the Indian electorate of over 810 million entrusted Mr Modi and the NDA Government with the job of building a stronger India. Mr Modi campaigned on an ambitious development agenda to be delivered through extensive reforms. Expectations and optimism were high after years of ‘policy paralysis’, high inflation and slowing economic growth.

But change was harder than PM Modi had predicted.

The NDA Government promised an India “that encourages investment and rewards enterprise”. Yet, progress on pushing through “big bang” reforms that many had hoped for, including on land, tax and labour laws, has been underwhelming. Despite a sweeping victory in the elections to Indian parliament’s lower house, the Lok Sabha, the Government’s biggest hurdle has been the lack of a majority in the Rajya Sabha (upper house), which has stronger blocking powers that the UK’s House of Lords. Key legislation such as the Goods and Services Tax, have been languishing in the upper house, amid disruption to parliamentary proceedings.

Seeing success

Although these can be perceived as failures given the high expectations, India’s business environment has undoubtedly improved. In the World Bank’s ease of doing business report released last year, India’s ranking improved by 12 places and, according to an Ernst & Young survey, twice as many senior global executives picked India over China as their top investment destination over the next three years.

The NDA Government has made infrastructure investment a priority and is focused on streamlining regulations and increasing transparency to enable new development. All sectors are targeted, particularly the manufacturing industry through the ‘Make in India’ initiative.

While there has been a lack of ‘Big Bang’ reform, there has been success. Most notably on lifting restrictions on foreign investment in sectors such as insurance, railways, defence, retail, ecommerce and real estate. The Government’s policy on fiscal rectitude, reducing subsidies and encouraging ‘cooperative – competitive federalism’ also augurs well for the Indian economy.

Present picture

The current situation is hopeful in India – home to the world’s largest youth population with 356 million 10-24 year-olds. With GDP projected to expand 7.6% in this fiscal year, India has eclipsed China as the world’s fastest-growing major economy. A favourable external environment, particularly the sharp decline in oil and commodity prices have helped bring down inflation, improve corporate margins and shore up the current and fiscal accounts.

As Modi approaches the middle of his term as Prime Minister, it is critical that such favourable domestic and external circumstances be used as a catalyst for much-needed fundamental reforms which can fulfil India’s economic potential. The ‘honeymoon period’ of the Government when Modi was at the peak of his popularity is gone. After the 2014 general election, Modi’s Bharatiya Janata Party (BJP) scored equally impressive victories in state elections in Haryana and Maharashtra. But within the space of less than a year, the BJP was defeated in the Delhi and Bihar elections. Even though the BJP had won a substantial share of the votes, it was unable to translate that into assembly seats in the face of a united opposition. This was a big setback for BJP as winning elections in the states was a way to gain majority in India’s Upper House, for it is the state assemblies that elect representatives to the Upper House.

After the latest round of state-assembly elections, BJP is now riding high with a historic victory in Assam. But the outcome would not lead to any immediate significant structural change in the composition of the Upper House. Elections to the Upper house take place in a staggered fashion and the earliest that the BJP-dominated Assam legislative assembly will get to send its nominees is June 2019.

All eyes now on BJP’s performance in Uttar Pradesh state elections in 2017, but observers say that even though wins in the state elections can boost the morale of the BJP, it is unlikely for the Government to get a majority in the Rajya Sabha by the summer of 2019. The Government should instead reach out to the opposition parties to implement a lean, rational and predictable regulatory regime. This will set in place a system that can draw in significant private investment, boost productivity and long-term growth.

India has set itself ambitious goals and there is no reason why these cannot be achieved. If the Government perseveres with its policies, India may soon turn out to be the world’s star performer

In this age of growing interconnectedness and given the rising importance of India in the world, UK businesses need to continue thinking of new ways and strategies to engage with India. India’s favourable economic environment, together with the Government’s policy reforms and initiatives such as ‘Make in India’, ‘Digital India’, ‘Smart Cities’, ‘Skill India’, ‘Startup India’, offer more opportunities than ever for UK businesses.