The New Investor Friendly India

Earlier this week the president of India, Mr. Pranab Mukherjee, addressed the Indian Parliament. This was on the occasion of the first sitting of parliament following the elections that brought the new Prime Minister Narendra Modi to power with a landslide victory. The emphasis of  the presidential speech was on economic reform and a return to double digit growth, something that has been lacking in the last two years, which have seen less than 5% growth apiece. According to Mukherjee, putting the economy back on track is of paramount importance. 

How will this be achieved? Through initiatives like the introduction of a goods and service tax, encouragement of foreign direct investment, making the tax regime more business friendly, controlling inflation, and investing in infrastructure, just for starters. The infrastructure promise includes the pledge that by 2022 every family will have a good home with a constant electricity supply. The railway will be upgraded, and new roads and airports will be built.

Investment, both domestic and foreign, will lead to job creation. With 10 million people entering the workforce every year, that will be music to the ears of so many of the younger voters who wanted an end to the rule of the Congress Party. After being in power for 55 of the last 67 years, and most recently for a continuous 10 year period, the Congress Party is perceived as being responsible for the recent poor economic performance, in spite of almost double digit growth in four of those years. It is also seen as a party riven with corruption.

Controlling inflation is seen as high priority. Consumer Price Inflation hit a high of almost 9% in April, due mostly to higher food prices. The volatility of food prices has been linked to a poor supply chain – namely warehouse shortages, food hoarding and black market activity, unpredictable supplies of vegetables, and the generally weak infrastructure. These ‘bottlenecks’ will be addressed by the new government. Meanwhile, in an effort to contain inflation the Reserve Bank of India has raised interest rates three times since last September.

The coal sector will be one of the first industries to be targeted in a drive to improve efficiency and output in a ‘transparent’ way. Corruption and bureaucracy have seen mining output decrease, and India is a large importer of coal even though it has plenty of it available at home. One suggested plan is to break up the state owned Coal India company into smaller independent units, and also to open up the sector to private investment, including foreign investment. Coal is a cheap and potentially plentiful form of energy from India’s perspective, so improving the efficiency of its production is an urgent task.

India is also expected to lift restrictions currently limiting online retailers like Amazon from selling their own products in the country. Freeing up the ecommerce space is predicted to boost a contribution of 4% to economic growth by 2020, as opposed to 1% at the moment. Opening up the economy to online giants like Amazon is expected to benefit local manufacturers and suppliers as they form partnerships with Amazon and others to source cheaper local products. The decision to press ahead with this more liberal approach may well be announced in the first budget of the new government in July.

Another area for improving the ratio of foreign direct investment is in companies in the defence sector, where figures of up to 100% have been quoted. In the last ten years foreign investment has accounted for only $5billion of a $322 billion dollar overall investment in the sector. Private Indian companies have only been permitted to operate in the defence arena since 2002. Although the need for investment exists, there is some resistance to allowing such a high level of participation by foreign investors. If they are to be allowed to invest it should be conditional on a transfer of technology to India and training of Indian employees, said a source from Larsen and Toubro, a large Indian private defence contractor.

It is one thing to talk a good reform package, but can Mr. Modi deliver? He was credited with  great success as Chief Minister of Gujarat, where under his stewardship the economy grew and the state prospered. He even saw to it that the state had electricity 24 hours a day. Whether he can apply that golden touch to the economy of India as a whole remains to be seen. His image is one of a man who is corruption free, which no doubt helped him get re-elected as Chief Minister of Gujarat three times.

Responding to the president’s speech on Wednesday, Mr. Modi said "It is the collective responsibility of all elected representatives to fulfil the faith reposed in us by the electorate. I reassure the house that all the promises made in the President's speech will be delivered." He went into detail, citing enhancement of agricultural productivity as one step on the path, and encouraging the wider use of organic farming methods in the whole of the North East of the country, with the aim of entering the global market in organic produce.

Elimination of poverty will be reduced through more educational opportunities and the lowering of food prices. Even currently skilled workers should be given more chances to improve their marketability through further education. This also leads to improved social status, and the improvement of the social infrastructure in India is another important factor in the resurgence of the country. Mr. Modi admitted that the Gujarat model could not be applied across India, saying that “Different states offer different lessons and we plan to implement the best examples.”

The new government is in the honeymoon phase, and euphoria is high. There can be no underestimating the challenge facing Mr. Modi though as he begins his reformation. The mood has been optimistic and was certainly reflected in a surge in the stock markets once the election results were almost certain. Mr. Modi’s first budget in July should give a clearer indication of just how he intends to begin the great Indian comeback, and also give a clue as to just how investor friendly India might turn out to be.