Following its staggering landslide victory, Narendra Modi’s Bharatiya Janata Party (BJP) has a mandate for real reform. Still, quick successes are needed to sustain political and market momentum. The pro-business former chief minister of Gujarat state should start with infrastructure, tax, and banking.
The central challenge is growth. For the past two years, GDP has expanded by less than 5 percent annually, down from an average of almost 9 percent in the five years before 2008.
That means fewer jobs for the millions of young Indians joining the workforce each year. Employment increased by just 2 million each year between 2010 and 2012, down from 8 million annually in the first five years of the millennium.
Some of the blame lies with fiscal indiscipline, runaway inflation, a wobbly rupee, and cagey foreign investors. But a huge culprit is collapsing investment.
India has all but stopped building new factories and machinery. The problem, particularly acute in infrastructure and mining, stems from infighting between Delhi ministries and interminable local approvals.
An understandable backlash against corruption hasn’t helped. The outgoing Congress Party’s “cabinet committee” has helped dent the backlog. But a lot remains to be done. Modi needs to force through more approvals from central government, insist that departments work together, and browbeat local officials.
Tax is another target. India has taken a tough line with multinationals like Nokia, Shell and Vodafone. The UK mobile phone group won a $2 billion-plus tax case in India’s top court, only for New Delhi to retrospectively change the law. The dispute is now headed for international arbitration.
Global companies are often aggressive with tax. But India’s current stance deters foreign investment. The BJP calls this “tax terrorism”, which implies it is planning to change tack. Modi’s finance minister could use his first budget to send a powerful message to international business that India’s tax policy is becoming more predictable.
For domestic companies, too, tax could change. For years, politicians have debated a so-called goods and services tax to replace some of India’s many indirect charges. Business lobby groups reckon this could add 1.5 percentage points or more to GDP growth, while slowing inflation.
Pushing the levy through parliament, though, will be a challenge because Modi’s party doesn’t control the legislature’s upper house.
The financial system is also due an overhaul. Most lending is still done by badly run, overstaffed, and undercapitalised public-sector banks.
A recent timely report from the Reserve Bank of India lambasted the banks’ governance and performance, said the government should give up its majority shareholding in state lenders, and warned the sector may need 2.1 to 5.9 trillion rupees ($36 to $100 billion) of fresh capital by 2018. The central bank’s recommendations provide a helpful spur to government action.
Downsizing welfare programmes like India’s rural job guarantee and using the savings to recapitalize banks would help to give lending a short-term boost without burdening an overstretched federal budget.
Even outside banking, there is ample scope for privatisation. The state has stakes in everything from miners and airlines to hotels and a major producer of newsprint. Drawing up a privatisation plan would be a bold statement of intent, though it will take at least a year to get the auction going.
The new government can also open the door to overseas investment. Though the BJP has pledged to keep out international supermarket chains, many of the existing limits on foreign direct investment can be eased without legal manoeuvring. Obvious candidates are railways and defence production.
Meanwhile, an immediate increase in government-controlled natural gas prices will boost domestic production and get some idle power plants humming again.
This is just a first-year agenda. India sits a miserable 134th in the World Bank’s “ease of doing business” rankings: it is an especially bad place to start a business, enforce contracts and obtain building permits. Addressing these gripes would help restore confidence.
Agriculture, too, deserves attention. Far too much food is wasted between farm and plate. For now, though, sustaining the “Modi rally” in the stock market is crucial, as it will give the most indebted Indian groups an opportunity to raise equity.
With the most decisive electoral mandate of any Indian government in three decades, Modi’s government can start ticking things off its to-do list at once.