Budget 2020 aside, these are some of the reforms that India can execute without causing political 'heat and tension'

Budget 2020 aside, these are some of the reforms that India can execute without causing political 'heat and tension'
India's Prime Minister Narendra Modi at the inaugeration of the Raisina Dialogue 2020ORF

  • Policy analysts feel that the reform agenda has taken a back seat to political issues during Prime Minister Narendra Modi’s second term in office.
  • However, they believe small changes — like caps on foreign direct investment (FDI) and fixing the goods and services tax (GST) — can be made without "generating a lot of heat and tension".
  • The Indian economy has gone from being one the fastest growing in the world to hitting stagflation in a matter of months.
Narendra Modi’s second term as India’s Prime Minister has been fraught with protests and political tension. With the Union Budget 2020 around the corner, many are wondering what the central government’s vision is for reforms in the coming year.

Policy analysts at the Raisina Dialogue 2020 feel the government may be a little distracted. However, despite political issues, there is room for reform without upsetting too many feathers.

"I think what has happened in the second term, as far as perception goes, is we sense that the administration has gotten distracted with the political issues than the reforms issues and then economic issues," said Bharath Gopalaswamy, Senior Fellow at the Observer Research Foundation (ORF) India on the sidelines of Raisina 2020.

India went from being the world’s fastest-growing economy to hitting stagflation in a matter of months. Retail inflation is on the rise, factory output is nowhere close to its targets, and some industries in the sector are on a negative growth trajectory. Analysts predict that the country’s economic growth is likely to stay subdued in the future as the slowdown deepens.

However, Richard M. Rossow, senior adviser of US-India policy studies at the Center for Strategic and International Studies (CSIS), believes the government still has a few some options — like removing restrictions on FDI, fixing the goods and services tax (GST) and simplifying bankruptcy procedures.

Nursing the economy back to health through FDI
"I think there’s room to do some reforms that won’t take as much political will. Look at FDI [foreign direct investment] caps — 21 years ago, any FDI cap was a political hot potato. And now, the government’s opening up defense, retail and insurance — and the blowback against doing that has been relatively minor," Rossow said.

According to the Department of Promotion and Industry and Internal Trade (DPIIT), the inflow of foreign investment has not been impacted by the slowdown. However, not all sectors in the Indian economy are open to 100% FDI — a few are still completely restricted.

"There are about 20 other sectors that still have FDI restrictions. Without major blowback or opening up most of those, the potential quick injection of new money by foreign investors is relatively easy," explained Rossow.

Life insurance companies are already lining up government lobbies to increase automatic approval from 49% to 100%. Investment under the automatic route does not require prior approval from the government. On the other hand, the government is looking to cap investments in digital media companies to 26% leaving foreign websites with 100% investment, confused.

Dealing with debt and fixing tax regimes
Aside from FDI, Rossow believes that the smaller steps like fixing issues with the goods and services tax (GST) and bankruptcy code can also be implemented without "generating a lot of heat and tension".

Simplification of the GST is also a reform suggested by Indian economists for the upcoming budget. Indian mobile makers are also looking for a reduction of GST on parts and accessories.

When it comes to the banking sector, sources told PTI that the government has no plans of capital infusion and is, instead, looking at encouraging banks to expedite the recovery of bad loans. However, that’s easier said than done.

"Currently there are a lot of defaulters and banks that are underwater because of this ‘bad lending’, so to speak. But you also run the risk of excessive regulation and excessive scrutiny. You want to protect the regulator yet at the same time, somebody who has good credit should be able to get loans easily rather than pay the price for someone who will willfully default," explains Gopalaswamy.

The haziness around the National Company Law Appellate Tribunal (NCLAT) and its dealings with the Indian Bankruptcy Code; is also posing hurdles.

"We [private sector] are dealing with the Indian Bankruptcy Code and we’re dealing with the NCLAT process. And, the process is so cumbersome. At some levels it’s opaque and it’s still evolving. So the uncertainty as a foreign company trying to buy an Indian company or do a joint venture is still not the easiest process out here," he added.

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