Modi finds his mojo

Financial Mirror (Cyprus) - - FRONT PAGE - By Tom Miller

In­dia, ac­cord­ing to its many skep­tics, will never change. It is too messy, too un­wieldy—per­haps too demo­cratic—to em­u­late China as a driver of global growth. For all the hoopla that greeted Naren­dra Modi’s elec­tion in 2014, lit­tle changed for the bet­ter dur­ing his first two years in charge: the new gov­ern­ment failed to pass “big bang” re­forms, banks stopped lend­ing, and in­vest­ment slumped. Crit­ics ac­cused Modi of be­ing all talk and no ac­tion.

Af­ter a sum­mer of re­form, those crit­ics must now eat their words. The Goods and Ser­vices Tax bill, passed in Au­gust, is one of the most sig­nif­i­cant pieces of leg­is­la­tion since In­dian in­de­pen­dence. The adop­tion of in­fla­tion tar­get­ing— ce­mented into law last month and over­seen by a quasi­in­de­pen­dent mon­e­tary pol­icy com­mit­tee—means the cen­tral bank is no longer in thrall to the gov­ern­ment. A new bank­ruptcy code, passed in May, is a key step to help clean up bank bal­ance sheets. Moves to scrap oner­ous for­eign in­vest­ment reg­u­la­tions have helped push In­dia to the top of the global FDI rank­ings for green­field projects, ahead of China. And, cru­cially, ef­forts to nur­ture a spirit of com­pe­ti­tion and en­ter­prise among In­dia’s 29 states are bear­ing fruit. It is still early days, but in­vestors should start to take In­dia se­ri­ously.

It is dif­fi­cult to over­play the sig­nif­i­cance of the GST. By cre­at­ing a uni­fied tax sys­tem that will al­low goods to move freely across states, it prom­ises to trans­form In­dia’s frag­mented econ­omy into a gen­uine com­mon mar­ket. In time, this could add as much as 2pp to an­nual eco­nomic growth. Pass­ing the GST bill re­quired Modi to bring both the op­po­si­tion and In­dia’s 29 state gov­ern­ments on board, prov­ing that his gov­ern­ment has the po­lit­i­cal cap­i­tal to get things done. The GST Coun­cil will meet over the next few weeks to fi­nal­ize a deal that should al­low GST to be op­er­a­tional by April.

More im­por­tant for In­dia’s im­me­di­ate growth prospects are re­forms to ease pres­sure on its strug­gling banks. The bank­ruptcy code should, in the­ory, en­able lenders to re­cover funds more quickly from stalled in­fra­struc­ture projects— vi­tal, as these are the big­gest source of stressed as­sets. Mean­while, ef­forts to lib­er­alise the bond mar­ket will help banks to meet tough cap­i­tal re­quire­ments, thereby freein­gup cap­i­tal for loans. As banks rec­og­nize NPLs, re­struc­ture loans and re­pos­sess as­sets, we ex­pect In­dia’s stalled in­vest­ment cy­cle to turn in the sec­ond half of next year.

Ar­eas where the cen­tral gov­ern­ment have so far failed to make much head­way in­clude land and labour re­form. A new bill that would no longer re­quire firms to seek cen­tral per­mis­sion to lay off large num­bers of work­ers could be pre­sented to par­lia­ment in Novem­ber, as Modi seeks to ride the mo­men­tum gained from the GST. Since vig­or­ous protests are a cer­tainty, it would be no sur­prise if it fails. But the grow­ing power of In­dia’s states, boosted by New Delhi’s de­vo­lu­tion of fis­cal pow­ers to state gov­ern­ments, means that re­form of fac­tor mar­kets will hap­pen any­way. Modi is al­low­ing states to al­ter, or even bend, cen­trally-man­dated rules such that am­bi­tious lo­cal min­is­ters can seize the ini­tia­tive.

Take labour leg­is­la­tion, which is the shared re­spon­si­bil­ity of both the cen­tre and the states. Fed­eral law re­quires firms with more than 100 em­ploy­ees to seek per­mis­sion from the cen­tre be­fore they lay off work­ers. But the states of Ra­jasthan and Mad­hya Pradesh have amended their laws to push that fig­ure up to 300 em­ploy­ees. And in the state of Te­lan­gana, min­is­ters claim that re­stric­tive na­tional labour laws do not ap­ply in its many spe­cial eco­nomic zones, where it has im­ple­mented a more lib­eral regime.

Modi is pop­u­lar among the more for­ward-think­ing state gov­ern­ments, even those that are not aligned with the BJP. De­spite be­ing mocked by lib­eral com­men­ta­tors for gal­li­vant­ing around the world as a trumped-up trav­el­ling sales­man, state-level min­is­ters say Modi’s for­eign trips have suc­ceeded in es­tab­lish­ing that In­dia is open for busi­ness. The “Make in In­dia” cam­paign has fo­cused their at­ten­tion on at­tract­ing for­eign in­vest­ment. A hand­ful of states have long courted for­eign com­pa­nies—Modi’s home state of Gu­jarat is an ob­vi­ous ex­am­ple—but that mind­set is now spread­ing across the coun­try.

Busi­ness peo­ple I spoke to in In­dia ear­lier this month were up­beat. “We’ve done more busi­ness in the last 10 months than in the pre­vi­ous seven years,” the pres­i­dent of Boe­ing In­dia told me. In pro­gres­sive states like Te­lan­gana, which has at­tracted a flurry of big for­eign in­vest­ments over the past year, the word on the street is that 2017 will be even bet­ter. Af­ter ini­tially strug­gling to live up to un­re­al­is­tic ex­pec­ta­tions, Modi has fi­nally found his mojo.

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