HOPES OF BUSINESS-FRIENDLY REFORMS FADE AWAY IN INDIA
Eliminating red tape has proved tough for PM Narendra Modi
Even as India shines as a rare bright spot in a sluggish global economy, the country’s business-savvy prime minister is watching his popularity wane.
Narendra Modi swept into power in May 2014 on the strength of a charismatic personality and a promise to eliminate India’s legendary bureaucratic barriers to business. Today, India’s corporate leaders are losing faith that he can remove those obstacles. And public support has fallen as well: If elections were held today, Modi’s ruling Bharatiya Janata Party would lose its majority in parliament, according to a recent poll by Karvy Insights.
“Expectations were high and people wanted to see a quick turnaround (of the economy),” said Dharmakirti Joshi, chief economist at Crisil, the Indian arm of Standard & Poor’s. “But big-ticket reforms ... have been delayed and diluted.”
By some numbers, Modi’s performance looks stellar:
Despite a global slowdown, India’s economy is expected to grow 7% to 7.5% for the year ending in March, just above the 6.9% rate recorded the year before he took office.
Foreign direct investment from October 2014 through June 2015 increased 40% compared
with the same period a year earlier, thanks to his “Make in India” program, which eliminated or reduced restrictions on foreign investment in many manufacturing sectors.
Foreign exchange reserves now top $350 billion, India’s highest level ever.
“A lot of confidence and hope continues to be built around India,” Finance Minister Arun Jaitley said Monday as he outlined a $288 billion spending program for the fiscal year ending March 2017.
Nevertheless, long-awaited moves to loosen restrictions on land acquisition and a tax over- haul sought by corporations to boost business have yet to materialize.
That’s because opposition parties that control the upper house have blocked his boldest policies, thwarting the strong majority his party holds in the lower house of parliament.
Eliminating the red tape also has proved daunting. India jumped 12 places on the World Bank’s ease of doing business index during Modi’s first year in office — from 142 to 130 — but many complex regulations and paperwork requirements have not been reduced.
Corporate leaders also note that a lack of skilled workers in India prevent Modi’s “Make in India” program from becoming reality.
“Some low-scale manufacturing may move to India. But if you want to build Brand India, you have to first build global Indian brands,” Anand Mahindra, chairman of the Mahindra group, which makes cars, farm equipment and other products, told In
dia Today newspaper. Other business leaders praise Modi’s accomplishments in a country where making any major change in how things are done is exceedingly difficult.
Binod Agarwal, CEO of a small auto-parts manufacturer, New Engineering Works, cites an increase in government services available online and says his company has seen a 30% to 40% increase in sales since 2014. Government “has become more efficient and more transparent, and less dependent on govern- ment officials,” Agarwal said.
In his budget speech Monday, Jaitley unveiled measures designed to rekindle Modi’s popularity. Tripling outlays for rural development, he promised to double farmers’ incomes over the next five years, an ambitious goal many economists consider impossible.
Reacting to the early portion of Jaitley’s speech on Twitter, veteran political commentator Shekhar Gupta suggested its tone “echoes a hard Agro-povertarian swing,” indicating the government was “losing nerve early” on reform.
With the global economy in the doldrums, India cannot rely on export growth, so it must focus on stimulating domestic demand. While urban consumers are already spending, the real potential lies in rural India, where measures such as massive spending increases on roads and tax exemptions for food processors can simultaneously create jobs and new consumers.
Notably, the outlay for rural Indians does not come in the form of free money or other market-distorting measures, such as an increase in minimum support prices for crops, Shubhada Rao, chief economist at Mumbaibased Yes Bank, pointed out. There’s also $33 billion in funds for infrastructure development and a plan to lower corporate tax rates to 25% from 30% over the next five years.
“The budget looks to address the weakest link in India’s growth, which is the rural and farm economy,” Rao said.
“Big-ticket reforms ... have been delayed and diluted.” Dharmakirti Joshi, chief economist at Crisil, the Indian arm of Standard & Poor’s