Modi's Whirlwind First Year

Narenda Modi’s first lieutenant describes how far India has come — and what still needs to be done

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Ask Arun Jaitley about India’s 7.5 percent GDP growth rate, and the Minister of Finance is unimpressed. Never mind that the World Bank calls India the world’s fastest growing major economy, or that 2015’s open-throttle growth rate is expected to beat both China’s and any pace India has managed in recent memory. “India’s potential is far higher — 8 percent or 9 percent over the next two years,” Jaitley told a packed breakfast crowd in a recent discussion sponsored by the India Business Initiative at the Chazen Institute of International Business at Columbia Business School.

In a presentation titled “One Year After: Progress on Economic Reform in India,” Jaitley insisted he is not alone in his edgy optimism following last year’s landslide victory for Prime Minister Narenda Modi. “For so many years, India has been told that change will happen,” he said. “Now the economic agenda is part of most discussions in India. People do not want to be calm and patient any more.”

Many of Modi’s moves have been aimed at attracting foreign investment, which, after rising 39 percent in 2014, is now almost equal to domestic investment flows, said Jaitley. “What deterred FDI in the past is that India’s policies were moving backwards,” he said. “An extremely important mindset change has taken place in India that recognizes that foreign investment is an important resource.”

Crucially, Jaitley sees no contradiction between the current government’s pro-business stance and eroding the 25–30 percent poverty rate that still plagues India. The increase in general prosperity and attraction of FDI means more money pouring into the country’s tax coffers. Money that was once spent on ineffective programs and across-the-board subsidies can be reallocated to infrastructure and programs that help those in most need. This approach, he said, goes way beyond trickle-down benefits and can be used directly to alleviate poverty.

Executive Orders Galore

Modi’s greatest contribution to India in his first year in office after years of political stagnation is determination, Jaitley said. The administration has largely bypassed Parliament by issuing back-to-back executive orders to enact sweeping change. Parliament must still vote on permanent enactment of each ordinance, but the executive branch can simply reissue any that Parliament fails to vote on.

Three of four key ordinances have been voted into law, noted Jaitley, including legislation that ups the foreign investment allowed in accident and life insurance companies and pension plans from 26 percent to 49 percent.

Companies such as Standard Life of the United Kingdom, Mitsui Sumitomo of Japan, Cigna of the United States, and Axa of France immediately signaled their intent to raise their stakes with Indian insurance partners. Observers have speculated that anywhere from US$3 billion to US$10 billion could pour into the industry as a result of the law change.

The increase has not been as dramatic in money invested in pensions, which are held by just over 10 percent of the country’s citizens. Still, Jaitley expects that number to rise as momentum on additional social programs takes hold.

Also approved were ordinances that paved the way to privatization of mining by allowing private companies to bid on coal quarries and other mineral mines. Although it has large reserves of coal, India has been unable to meet its needs despite copious imports, and the country suffered acute shortages after the Supreme Court ruled last year that existing leases allocated by the states could not continue in perpetuity. The new legislation encourages investment by offering 50-year leases.

Still pending is a controversial ordinance that amends the Land Acquisition Act enacted in 2013. Land sales designated for specific uses — including social infrastructure such as schools, rural infrastructure such as roads and power plants, and housing for the poor — no longer require the approval of 80 percent of landowners and don’t need to undergo social impact public hearings. The government has said the ordinance could drop barriers on projects worth US$300 billion and increase the chances that landowners will be paid.

The Modi administration’s next target is corporate taxes. Jaitley promises the Goods and Services Tax (GST) Bill now pending in Parliament will become the law of the land in 2016. The proposed tax would lower the current average India tax rate from about 30 percent to 25 percent.

Proponents say even more important, the GST would finally transform India into a common market since it would replace today’s multilayered taxation system where both the central government and state governments assign levies to goods and services. It would also abolish such indirect taxes as the central excise duty, entertainment and luxury taxes, and state value-added taxes.

Busy, Busy

Beyond executive orders, the Modi administration has also pushed through numerous reforms. It has done away with two-thirds of the subsidies that were routinely doled out, including government money allocated to household purchases of petroleum and cooking oil. “We can now spend the money that went to subsidies on irrigation or sanitation programs,” said Jaitley.

The creation of the Micro Units Development Refinance Agency (Mudra) in April could double the amount of loans targeted at very small businesses.

Perhaps the most famous and widespread of the reforms has been the Financial Inclusion program. Now most Indians now have bank accounts, which came with a debit card, accident insurance coverage, life insurance, and modest overdraft protection. The government helped fund 125 million of the accounts by channeling subsidy and pension payments directly to checking accounts.

In the next few months, look for additional social security programs, “some of which will be highly popular,” Jaitley promised.

He said India does not have the luxury of resting on its accomplishments. “For India to grow faster, the pace of decisions must be faster. Implementation has to come faster.”

Jaitley said he is optimistic that more changes are imminent. India, he said, has a new determination.

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