UP polls 2017: With all decks cleared, it would be a litmus test for PM Modi
Source: The Economic Times
After the elections in several key states, the BJP finds itself in a sweet spot. The victories appear to be the product of GoI’s concerted efforts to address the woes of the common man. The Narendra Modi government has conceived and implemented a host of fiscal and non-fiscal reforms since coming to power.
Well-thought-out measures have been activated on various fronts: foreign investment policy, indirect taxation, labour laws, the Insurance Act, dispute resolution, black money, et al.
The recent electoral mandate, the first formal exhibit of public opinion since demonetisation that was criticised intensively by leaders of the opposition and other critics, ought to be regarded as a game changer for Indian political dynamics. Given the confidence shown by voters, it seems that the government could well be on course for a second term at the Centre, thus providing itself a rather comfortable time span to implement sustainable economic reforms.
The aftermath of this event could be quite interesting to watch, as this could serve as GoI’s springboard for ushering in the next set of reforms. Statistics indicate that about 54% of the Indian population — and about 64% of the Indian territory — is now being governed by the BJP, whose influence is spread much beyond its traditional territories. This creates room for synchronised policymaking and implementation, at the federal and state levels.
Enthused with the recent success, the central government is expected to continue with its aggressive economic reforms to improve the macroeconomic fundamentals for regaining momentum — temporarily mired on account of demonetisation — and strengthening the currency with an increased dosage of investments.
In the middle of growing cries of ‘protectionism’ in the world, India, daringly, seems to be on the brink of another liberalisation of foreign investment policy, with GoI’s eyes pegged on enhanced dosage of FDI reforms.
The extent of investor traction generated, however, would depend largely on external factors, such as performance of the major economies across the globe, the impact of Brexit and the future of the EU. The government would keenly monitor the developments on US visa and border tax issues, and assess US President Donald Trump’s stance on trade ties with India. May is expected to be the date when Modi and Trump meet, the groundwork for which has been laid by foreign secretary Subrahmanyam Jaishankar.
Another facet to deliberate from the investment standpoint is India’s evolving tax regime. In the recent past, India has implemented a number of complex path-breaking legislations and is on course to implement a few more, such as the General Anti-Avoidance Rule. Considering that India’s current performance on taxation-related parameters for ‘ease of doing business’ is far from satisfactory, the law should prescribe adequate checks and balances to ensure that such legislations do not emerge as investment deterrents, neither perceptibly nor practically. In the same vein, significant reforms are needed in the context of the tax dispute resolution framework, so that India’s ranking as a ‘preferred investment destination’ improves further.
A key challenge confronting GoI is the state of the banking sector. Banks, the backbone of India’s financial sector, are tremendously stressed on account of ballooning non-performing assets and are, thus, constrained in terms of lending abilities. In recent years, both the government and the RBI have put forth different measures including consolidation of banks, creation of a ‘bad bank’, an asset management company and a public sector asset rehabilitation agency, to address the bottlenecks of Indian banks.
Considering that the performance of the banking system would have a cascading effect on industry, GoI may now seek to swiftly implement the reforms for reviving the banking sector.
The government’s approach towards labour reforms has been rather timid in past, given the political sensitivities. The electoral mandate is likely to improve the situation in two ways: GoI’s confidence for pursuing labour reforms would be higher; and the Opposition would now be wary of being publicly tagged as resisting these reforms.
Hopefully, GoI would now be able to embark upon structural changes in labour laws to build a favourable ecosystem for India’s massive labour force. It would be fair to say that the Modi government has been bold and extremely active in pursuing reforms to pedal up the economic growth. A few months ago, one may have regarded demonetisation as a potential blow for the government. However, if the state election results are any indication, it is clear that the public has embraced GoI’s bold move for the ‘greater good’. From here on till the 2019 Lok Sabha elections, it would be a litmus test for the government.