India: MODI's Second Innings: What To Watch Out For

Last Updated: 25 June 2019
Article by Khaitan & Co

Most Read Contributor in India, August 2019

With the Narendra Modi-led NDA government returning to power for a second term with a roaring majority, it is likely that stability and continuity in terms of long-term policies will benefit the economic environment in India.

And for investors, especially foreign investors, stability and predictability in terms of policies and regulations are a huge positive – signalling to them that their money is less exposed to risks arising from political turmoil, vast cabinet or bureaucratic changes and consequent hurdles to ongoing economic reforms.

Below are some of the key expectations from the new government in terms of policies and reforms going forward.

GOVERNMENT'S TOP PRIORITIES

  • Job creation – Recent Labour Ministry data pegged unemployment rate at 6.1% - a 45-year high. The government is likely to push for more manufacturing units to be set up locally to provide more jobs as well as engage in more skilling initiatives.
  • Attracting capital – FDI inflows fell during last year owing to uncertainty regarding the election outcome; they are expected to pick up sharply this year with the government pushing for further liberalisation of FDI policies.
  • Likely top sectors for FDI inflows – Defence, Telecom (5G rollout), Manufacturing, Renewables, Infrastructure, etc.
  • Boosting consumption, private investment and growth – GDP growth fell to 5.8% in the March quarter, rural consumption has slowed down (FMCG sales have been hit) and private investment cycle is yet to kick in – the government is likely to take measures (tackle liquidity crunch, make credit easily available, etc.) to address these issues on an urgent basis.

GEOPOLITICAL FRONT

  • India is likely to double down on its assertive stance to ensure its position in the South Asian region is not diluted but strengthened.
  • Government is likely to continue its hard stance on Pakistan; being firm on its "terror and talks can't go hand-in-hand" position.
  • India has been vocal about its concerns on China's Belt and Road Initiative (BRI) and will likely fortify trade ties with neighbouring and other countries to counter the BRI moves.
  • Efforts to get China to back India's claim over a permanent seat on the UN Security Council are likely to gain steam.
  • With the Trump administration recently ending preferential trade status for India, Modi is likely to tread carefully with Washington, especially given U.S.' hard stance against doing business with Iran and Russia (India has signed a USD 5 billion deal to buy missile defence systems with Russia which may attract U.S. sanctions).
  • India is also likely to work towards better ties with the U.S. to resolve issues regarding stricter immigration policies (H1B visa rules impacting IT industry) and pricing/FDA approval/sale of generic and other Indian drugs in U.S.

FOREIGN DIRECT INVESTMENT (FDI) POLICY

  • Government has targeted USD 100 billion worth FDI inflow in 2 years – FDI rules are likely to be liberalised further to achieve this target, with approval processes likely to become more streamlined.
  • In sectors like Defence, the percentage of FDI allowed through automatic route is expected to increase from current 49%; there are plans to consider 100% FDI in insurance intermediaries in India.
  • FDI in renewables space, telecom, e-mobility and smart-infrastructure likely to be welcomed and incentivized to help the government meet its own targets and goals in these areas (100 GW solar power by 2022, 5G rollout, shift to EVs, smart cities, etc.).

IMPORTANT DEVELOPMENTS ON THE CARDS

  • Now that the new cabinet is in place, clear policies on data protection and e-commerce are expected (Government unlikely to budge on hotly debated points of data localisation and onshore incorporation)
  • New industrial and labour policies are likely to be put in place
  • New foreign trade policy likely – export incentive schemes like MEIS (Merchandise Exports from India Scheme) to be discontinued, and to be replaced with WTO compatible schemes
  • New department of logistics proposed

TAX REFORMS

  • GST rate rationalisation and further simplification of the filing process is expected.
  • Discussions on merging of the 12% and 18% tax slabs to be held in GST council meetings this year.
  • Inclusion of natural gas along with other petroleum products and tax structure for solar projects, non-potable alcohol, lotteries, etc. to be taken up as well.
  • With tax collections being disappointing in the last fiscal, government is likely to take a hard stance on tax evaders (companies are already being pulled up).

SECTOR-WISE EXPECTATIONS

Infrastructure

  • Focus on infrastructure is expected to continue with roads and highway construction to remain a priority (government is targeting 40 kms of road construction per day)
  • In line with its election promise of INR 100 trillion investment in the infrastructure sector by 2024, the government is likely to focus on Metro projects, inland waterways, natural gas grids and airport privatisation, to give a fillip to private sector investment in the first few months of its tenure
  • Smart cities initiative likely to get a boost with more projects being sanctioned in the areas of smart urban mobility, smart power grids, construction of community spaces, etc.

Automobile Industry

  • Government considering allowing only EV (electric vehicle) 2 and 3-wheeler sales from FY24 onwards; major push towards electrification, battery manufacturing, charging infrastructure expected
  • Long term EV policy expected, localisation of battery/fuel cell manufacturing (incentives expected)
  • Scrappage policy for older vehicles expected in budget
  • Industry dealing with BS-VI emission norms transition, government keen not to disrupt sector too much

Manufacturing

  • Although the Make in India scheme did not take off as expected in Modi's last term, manufacturing is in focus this time around – especially with several companies looking to relocate their manufacturing units to India from China to hedge against the US-China trade war.
  • Incentives expected across sectors for those who source and manufacture locally

Real Estate Reforms

  • Sector has high expectations from the government to tackle issues like liquidity crunch, unsold inventory, delayed projects, disputes, delayed approvals, etc.
  • Biggest problem facing this sector is land acquisition – industry is hoping the government will streamline the approvals and clearances process
  • Increased focus on affordable housing is on the cards, with Modi's Housing for all by 2022 scheme taking centrestage going forward

Financial Services

  • Measures to address liquidity crisis especially in the NBFC space expected – RBI has proposed introducing a liquidity coverage ratio (LCR), i.e., a liquidity buffer, for large non-banking finance companies (NBFCs)
  • Recapitalisation and further consolidation in the public sector banks space is expected
  • Push towards digitisation and formalisation of savings to continue – fintech space likely to see heavy activity

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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