India: A New India, Or Old Wine In A New Bottle?

Last Updated: 18 December 2014
Article by Phoenix Legal

Although the sentiment at home has been one of guarded optimism, Prime Minister Modi was welcomed with rapturous applause in Australia both for the G20 summit and for his state visit to Australia. The Prime Minister has been recognized as a veritable "man of action" and as the much awaited force of change that India so desperately needs.

For instance, just before leaving for the G20 summit, Modi and Obama achieved a breakthrough on the WTO impasse – the disagreement between India on one side and possibly the rest of the WTO members on food security had threatened to derail the implementation of the Trade Facilitation Agreement. The implementation of this agreement is a high-priority item for developed nations and is expected to facilitate trans-boundary movement of goods by (amongst others) reducing customs and similar duties. It is reported that President Obama himself has credited Modi with achieving this deal.

During Modi's state visit to Australia post-the G20 summit, India signed five pacts with Australia including on issues such as social security and tourism. These pacts are expected to improve bilateral investments between India and Australia. The governments of India and Australia are also targeting the execution of a comprehensive free trade agreement.

On the home front, it appears that Modi has chosen to walk the more strenuous path to economic development. Rather than announce half-baked and quick-fire "economic reforms", Modi has instead sought to tackle structural issues. The Central Government has approved changes to certain industrial and labour laws in Rajasthan, the most significant of which is the proposal to increase the requirement for government permission to shut down a unit that employs fewer than 100 workers to 300 workers. This limit has been cited as one of the impediments to greater investment in labour intensive industries and is expected to boost domestic as well as international investment in the manufacturing sector in India.

The Finance Minister also announced that the government is expected to introduce the Insurance Laws Amendment Bill in the winter session of the Indian Parliament. The Insurance Laws Amendment Bill is a crucial piece of legislation and its passage is dear to the heart of the Indian insurance industry and the financial services industry in general. This bill, in various avatars, has been pending for nearly a decade and its passage will hike the foreign direct investment limit in Indian insurance companies from the current 26% to 49%. This hike would result in the injection of much needed funds to the tune of an estimated 25,000 crore rupees into a cash-starved industry and would also send a very strong signal to the domestic and the international business community on the government's commitment to its pro-business and reformist agenda.

The local business community is also closely watching progress on the introduction of a goods and services tax (GST) in India. The GST is described as a comprehensive tax on manufacture, sale and consumption of goods. This tax is expected to dramatically reduce (if not remove) the multi-layered taxation structures currently prevailing in India by introducing uniform tax rates across India and reducing exemptions. This is a key reform and a very cumbersome one as this will requires constitutional amendments. The Finance Minister recently stated that most of the contentious state-level issues on this have been resolved and that other state-level issues such as exclusion of liquor and petroleum products will also be resolved soon.

In a move that pleasantly surprised investors, the government refrained from making a populist move on re-introducing fuel subsidies following the global easing of crude oil prices. Following up on the deregulation of petrol prices, the government also deregulated diesel prices, thereby greatly easing the fiscal deficit by reducing the government's subsidy burden.

While all that ails India cannot be fixed overnight the government appears to be making steady progress on most markers. The allowance of 100% foreign direct investment in the railways sector and the increase of foreign direct investment limits from 26% to 49% in the defence sector have also been welcomed by both the Indian and the international business community. The government is also aggressively pitching its "Make in India" campaign to promote local manufacturing in India. It is anticipated that with the conclusion of state-level elections, the government will cast aside its restraints and will introduce further policy-level changes including further labour reforms and single-window clearances for projects. India and the world await with bated breath!

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