Author: Barbara Schmidt-Ajayi | Regional Manager India/South Asia |OAV – German Asia-Pacific Business Association

First published in M+V`s India Insight in April 2016

Prime Minister Narendra Modi came to power in May 2014 after a landslide victory in the parliamentary elections. For the first time in decades a party – the Bharatiya Janata Party (BJP) – won a majority of seats in the Indian house of parliament. Two years later India’s economic development is positive and the campaigns that have been launched show initial signs of success. However, until now the ground-breaking economic reforms announced in the election manifesto have not been realised.

As former Chief Minister of Gujarat State, Modi earned a reputation as a reformer and a politician who was sympathetic to business. Therefore, not without reason this state counts amongst the national pioneers in terms of economic growth, expansion of infrastructure and investor-friendly business climate. The population’s apathy under the ‘stale-mate’ of the previous government finally led to a clear victory for Modi during the May 2014 parliamentary elections. The BJP won 282 seats in the Indian lower house (Indian National Congress Party: 44 seats) and thus gained a historic political mandate to accede to power.

Modi has been able to successfully put into practice one of the electoral promises to improve the macroeconomic situation. According to government statistics, economic growth for the financial year 2015/2016 was 7.6 per cent and India rose to become the fastest expanding economy globally, while in contrast last year China’s growth was ‘only’ 6.9 per cent (albeit at a higher level). The inflation rate is now about five per cent – about half what it was before Modi.

Since taking office Modi has attempted to set a new agenda with numerous campaigns. In addition to ‘Skill India’, ‘Digital India’ and ‘Clean India’ probably the most well-known campaign is ‘Make in India’. This aims to attract foreign investors and to transform India into a global production location. As part of the campaign 25 chosen sectors receive special support, including the automotive and automotive parts sectors, renewable energies or infrastructure (ports, rail, roads and motorways).

Thanks to the improvement in India’s ‘ease of doing business’ ranking more attractive general conditions should be created for foreign investors, and Modi would like to improve India’s ranking with the World Bank from 130 to 50 (total countries ranked: 189). This involves not only efforts on a national level, but Modi is promoting competition among individual states to foster investor-friendly climates. Gujarat and Andhra Pradesh States are top of the rankings, but Maharashtra and Karnataka also appear among the ten most attractive Indian states. Infrastructure initiatives such as the Industrial Corridor Projects or the creation of industrial clusters should attract new investors as well as resolve logistical challenges. All Indian cities could apply to participate in the ‘Smart Cities’ initiative, and the first twenty cities have in fact been selected with further selection underway. Participating cities will get a lot of support in numerous areas from water/sewage and waste disposal to traffic and medical systems. The opening of vital sectors such as defence, construction and rail as well as intense supervision for new investors should also ensure that in future India attracts a higher number of investors.

smartcities-modified india

Examples such as the Taiwanese company Foxconn, which set up production in 2015 in Andhra Pradesh State, and has now announced further investments worth five billion US dollars in Maharashtra State, demonstrate initial successes for the ‘Make in India’ campaign. The statistics also reinforce this trend: for instance, India was named by the Financial Times as the most popular destination for green field investments during the first six months of 2015, even ahead of China and the US. However, in addition to actual transactions, pre-announced projects are also included in the statistics so these figures are to be read with caution.

Modi’s international relationship building has been a significant factor with his state visits usually followed by commitment of investment. For example the Indo-German governmental consultations in October 2015 set up a fast track mechanism for German companies to deal with actual corporate concerns or also general problems like anti-corruption measures. This system has been up and running since March 2016.

This all looks good, but despite the many campaigns and positive changes, resentment is spreading among business enterprises almost two years after Modi’s electoral victory. This is because up until now the announced reform plans have only been implemented on a step-by-step basis or not at all. Some of these delays are not the fault of the Modi government but all the frustration effects public opinion.

There are three particular planned changes that illustrate this: the introduction of the uniform Goods and Services Tax (GST), the simplification of land acquisition and reforms of employment legislation. The GST bill would involve the biggest tax reform in the history of independent India – if this were ultimately passed as law. However, not only both houses of parliament must approve its introduction, but also at least half of the Indian states. Currently, the draft bill is being blocked in the Indian upper house of parliament where the Modi government does not have a majority. During the parliament’s winter session in December 2015 the bill was therefore not passed and it is unclear whether a decision will be reached during the current legislative round, which still convenes until mid-April 2016. However, if during this time the new allocation of seats should be made in accordance with the last 2015 regional elections – this always occurs with time delays – the Congress Party would lose more seats and so it would be more difficult to block the bill.

Legal provisions concerning land acquisition are regarded as the reason for delays in investments and, in particular, for infrastructure projects as well. Sometimes these stipulate that 80 per cent of the involved population must agree to the acquisition. The Modi government proposed that these consensus rulings should be suspended and land acquisition should therefore be simplified in certain areas. This may make sense for business but it is not very popular among voters who do not see the potential benefits – only the potential for unilateral decisions made about their homes. After several directives were approved in the upper house, Modi suspended several further directives in the summer 2015 to avoid losing any more votes in the pending regional elections in Bihar. In 2016 another five regional elections are timetabled, followed by two regional elections in 2017. Faced with these challenges, it will be difficult for Modi to adhere to his reform proposal.

The planned change to labour legislation on a national level also led to opposition. Following the model of Rajasthan – companies here with up to 300 employees can now dismiss workers without regional governmental approval – the reform is slated to be implemented on a national level. However, in September 2015 about 150 million workers went on a 24-hour strike to challenge the plan after an appeal from the ten biggest Indian trade unions.

The implementation of the reforms will therefore also remain a challenge for Modi in future. Due to the diversity of supporters in his party such as nationalists, yet also members sympathetic to business, Modi must always build compromises to avoid losing any votes. Another reason for the slow progress of the reforms can sometimes be justified by the fact that Modi set out his programme over two five-year terms in office, so a longer time window exists for the implementation of the promised reforms. Understandably, therefore, changes are only implemented on a step-by-step basis. Nevertheless, companies ought not to disregard the fact that India as a whole is on a positive course and that many ground-breaking initiatives have already been established for a ‘modi-fied India’…