Modi’s first year leading India
Article 4 minute read

Modi’s first year leading India

15 May 2015

Last year, India’s Prime Minister Narendra Modi was voted into office with a clear reformation agenda. Our local Managing Director, and President of the Bombay Chartered Accountants' Society, gives an update on what has changed in the past 12 months.

The world’s largest democracy welcomed its 15th Prime Minister, Narendra Modi, with a strong historical mandate one year ago. Overnight, India was filled with renewed optimism about its future, much of which a result of Modi’s pledge to bring long-overdue transformation to the country.

Streamlined taxation

Since then, various liberalisation measures and economic reforms have been implemented by Mr Modi to create an environment conducive for businesses and investments. One of them is the nationwide Goods and Service Tax (GST), just passed in parliament and due to roll out in April 2016. The implementation of this long-awaited measure will integrate the fragmented state and federal taxes in India into a simplified national taxation system, transforming India into a common market accessible to trade and investment. The GST is expected to increase India’s GDP by 2% immediately through reducing the complexity and cost of doing business in the country.

Solving the land issues

The Land Acquisition, Rehabilitation and Resettlement Act (2013) passed by India’s previous administration has been known as one of the culprits of stalled infrastructure and stagnant foreign direct investment (FDI) in the country. Currently, development projects worth US$392bn are delayed as a result of pending land acquisition approvals. The law makes purchasing land for commercial purposes extremely difficult in India as every land acquisition is subjected to mandatory consent from at least 70% of the landowners and a compulsory Social Impact Assessment with very few exceptions.

In order to attract FDI and stimulate economic growth, the Modi government brought an amendment to the 2013 law exempting projects in five categories such as defence and infrastructure from the mandatory consent provision and Social Impact Assessment; the amendment is now pending in the Upper House. Once cleared, it would make land acquisition in India less onerous and thereby clear the largest obstacle in India’s road to industrialisation.

Make in India

Despite the significant growth India has witnessed in last two decades, it continues to depend significantly on agriculture. The age-old sector employs almost 50% of the population but only contributes 14% to its GDP. India needs industrialisation to accelerate economic growth and create jobs. The country has more than 10m people joining the workforce every year and this demographic dividend is perfect for labour-intensive manufacturing. Modi realises this and aims to unlock the country’s potential and transform it into global manufacturing hub through his “Make in India” initiative.

“Make in India” consists of a series of structural reforms in taxation, law, labour supply, infrastructure, transportation and logistics that set to create a business-friendly environment. Government agencies will work directly with foreign investors to assist them in cutting through the red tape of obtaining regulatory approvals and dealing with compliance issues. Incentives were also given to attract FDI. In Modi’s first budget, basic customs duty on 22 raw materials and components was reduced to zero from 10% to minimise the cost to manufacture in India.

Solid fundamentals

So far, the outcome of “Make in India” is encouraging as FDI into the country has seen a rise of 56%. Five months after the launch of the initiative, India received US$21.2b of inbound FDI compared to US$13.5b in the corresponding period one year earlier. If the trend continues, FDI into the country in 2015 would be the second-highest recorded since investment data was first collected 15 years ago. Last year’s fourth quarter also saw India record a GDP growth of 7.5% as opposed to 6.6% in the previous year. Some may argue the surge was due to the methodology changes made by the country’s central statistics office. However, the number is in line with the World Bank projection which estimates the Indian economy to grow 7.5% in 2015.

Modi's first year in office has been blessed with low crude oil prices; energy makes up one-third of India’s total imports, so cheap oil helped the country to reduce its fiscal deficit to 4.1% from 4.6% reported last year while giving its foreign reserve a 12% boost to US$340b. This year, India is expected to record a current account surplus of 0.3% for the first time in 10 years. Modi took advantage of the cheap fuel to drop the diesel subsidy that cost India 0.3% of its GDP in a bid to bring the country onto a more sustainable development path.

Going forward

The PM once said he would need 10 years to bring India into the 21st century. His debut year saw him set the tone for that and his forthcoming reformations. Judging from his latest approval rating of 74%, the people are certainly behind him. Now, what he really needs is bipartisan support from his colleagues in the parliament to push through deeper reforms.

The world is ready for India to overtake China to become the new global growth engine. But is India ready for it? Let's see if the country has the political will to step out of its own shadow and embark on an industrial revolution that involves one-sixth of the world population.

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