India: Assessing The Government's Performance One Year After Its Seminal Electoral Victory

Prime Minister Modi recently compared the signing of the seminal land boundary agreement with Bangladesh as the equivalent of bringing down the "Berlin Wall". A prominent op-ed commentator noted this comparison and attributed it as the Prime Minister's reaction to "insufficient public appreciation of the unfolding transformation in India's relations with Bangladesh". It is noteworthy that the government's actions not being adequately appreciated by the citizens and the business community appears to be a resonant theme for the government. This is perhaps an opportune moment to take a few steps back and assess the government's actions over the past year and also to consider the prognosis for the Indian economy over the course of the next financial year`.

While there has been an absence of "big bang" or "big ticket" reforms, a number of small measures have been announced and implemented, and have received favourable feedback. A case in point is the income tax return form which has been reduced from an intimidating 14 pages to a less intrusive 3 pages. Foreign direct investment (FDI) limits in sectors where additional capital and foreign know-how is urgently required – such as affordable housing and defence – have been raised and investment conditions have been relaxed. The government has also repeatedly laid emphasis on infrastructure building and the ease of doing business instead of populist measures. Such measures include allowing FDI in the railways sector, increasing FDI limits in the insurance sector and showing its intent in reforming India's archaic labour laws.

By pushing through the amendment to the Insurance Act to raise FDI limits, the government displayed its ability to negotiate and "horse trade" with a non-co-operative and potentially unruly opposition. This also sent a clear signal to foreign investors who were desperate for some action on reforms after the policy paralysis that afflicted the previous administration. Indeed, despite the logjam over some legislations introduced by the government, the Parliament has been brimming with activity, and has seen some of its busiest sessions ever – PRS Legislative Research notes that "Lok Sabha worked for 123% of its scheduled time, while Rajya Sabha's productivity was at 101%".

The amendment of the Mines and Minerals (Regulation and Development) Act to introduce auctioning of licenses has also been well received. Notably, to channel investments in the infrastructure sector, the National Infrastructure and Investment Fund, announced in the union budget for 2015-16 has also been established, with an initial corpus of Rs. 20,000 Crore (USD 3.15 billion approx.). In another much lauded move, the government has already moved forward with its plans to establish finance SEZs on the lines of Singapore and Hong Kong. This is with a view to reclaim Indian Rupee denominated business so as to create jobs in the financial sector which in turn will have a multiplier effect on creating jobs in other sectors.

On a general note, current GDP growth at around 7.5% now exceeds China's current growth rate, and reflecting the enthusiasm for the new government, the BSE Sensex too crossed the 30,000 points level (although it is currently hovering at the 28,000 points level). As of April 2015, the Index of Industrial Production for the manufacturing sector recorded growth at 5.1%. With respect to infrastructure, the roads ministry has been particularly busy – its annual progress report (2015) notes that in the first year of the ministry's functioning, up to 7,980 kilometres of National Highways were awarded for construction, and that construction of 4,340 kilometres of National Highways were completed. The macro-economic figures too are positive with India's current account deficit narrowing to 0.2% of GDP in the last quarter of the financial year 2014-15. Reuters notes that this is "a stark turnaround from the record high of 4.8 percent of GDP registered in the 2012/13 fiscal year, which brought on India's worst currency crisis in more than two decades". In yet another encouraging sign, the government is planning the issue of sovereign gold bonds to curb the import of physical gold. If these bonds provide to be popular with the investing public, then the reduction in the import of gold is expected to significantly ease the current account deficit.

While the Prime Minister's overseas trips have drawn flak from some quarters, most recognize these trips as an equal mix of proactive diplomacy and aggressive marketing to attract investments. Not only have these trips re-vitalized discussions about investing in India, these have also secured commitments for investment such as USD 35 billion from Japan (over the course of 5 years), USD 20 million from China, and USD 41 billion from companies in the United States. The government has also not shied away from difficult decisions such as completely de-regulating the price of diesel which previously accounted for around 50% of total fuel subsidies.

There have been obvious drawbacks to the government's pro-reform agenda such as its inability to push through the amendment to the land acquisition act and the dilution of the proposed goods and sales tax because of pushback from the states. However, these hurdles do not appear to be permanent and there is an impression that these will be overcome by the persistence of the current government. The government has also attracted criticism for, the passage of a law on black money that some perceive may discourage commercial transactions, and also its delayed and knee-jerk response to the "minimum alternate tax" controversy.

Various economists have also targeted the government and the Reserve Bank of India (RBI) for the perceived over-valuation of the Indian rupee which is seen to be detrimental to the competitiveness of Indian exports. The government and the RBI have also been criticised for not pushing through rate-cuts to reduce the cost of borrowings for Indian industries. However, in the backdrop of all this, the government and the RBI have succeeded in reducing inflation from the range of 8 to 10% to a more manageable 4 to 6%. While this has come in the backdrop of a collapse in global crude oil prices, credit must be given to the government for adhering to fiscal discipline and its slightly altered fiscal deficit target of 4%. Foreign exchange reserves too have risen to an all-time high of around USD 390 billion.

It is widely acknowledged that the state of the Indian economy is regarded with greater optimism outside India than within India. For instance, India had an unbroken streak of inflows from foreign portfolio investors (FPIs) for nearly a year until the "minimum alternate tax" fiasco. Even a contrarian like Christopher Wood of CLSA who did not favour investing in India has reversed his opinion earlier this year. Foreign investors appear to recognize an uptick in the investment climate of India due to the easing of crude prices and the general (albeit slow) march towards reforming and streamlining the financial and industrial sector regulations. The World Bank and the IMF too have noted India as one of fastest growing global economies currently. While Indian businesses and leaders have criticised the slow pace of reforms, there are others such as Ratan Tata, the former chairman of the Tata Group, has advised them to support the government and has also cautioned against disillusionment.

While many structural reforms are yet to be carried out and much remains for the government to do before the economy is truly back on track, there is cause for optimism as evidenced by prevailing low inflation rates and the controlled fiscal deficit. The persistence of the government in avoiding populist measures and continuing on the path of reforms despite the vagaries of electoral politics must be appreciated. Further, the reforms already implemented by the government are still nascent and tangible changes will only take place gradually and with the passage of time – although results are already apparent in the renewed interest shown by foreign insurance and reinsurance companies to enter and to do business in India. It must also be recognized that one year's administration is not sufficient to reverse or remove systemic faults that have existed for decades, and adequate time must be provided to the government to continue to implement its reform agenda.

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